Key Economic Shifts and Global Trade Dynamics

Posted on Feb 4, 2025 in Economy

Six Main Structural Changes in the Economy

  • Structural transformation of the production sector: Decrease in agriculture and growth of industry/service sector.
  • Growing openness and international trade.
  • Growing role of the state as an economic agent.
  • More equal income distribution.
  • Technological change: Modernization of the production system.
  • Transition of the population.

Factors Influencing the Decline of Agriculture in GDP and Employment

Many different things can cause the (relative) decline of the weight of agriculture in GDP and employment:

  • Engel’s Law: Demand for food rises slower than income (low-income elasticity) (after Ernst Engel, 1857).
  • Rising output productivity (technological change) reduces the absolute employment in agriculture (Cochran’s Treadmill, after Willard Cochran, 1979).
  • Translation of certain “agricultural activities” (input/output) to the industry.
    • Input: Animal feed, fertilizers, farm machinery, outsourcing (transport, construction, etc.).
    • Output: Food industry.
  • Diminishing marginal returns to workers and capital, given that the total land area is fixed.
  • Growth of the service sector (with high-income demand elasticity).

Solow’s Model and Decreasing Marginal Performance

Solow’s Model recognizes that the increase in capitalization rate has a decreasing marginal performance (RMD) regarding productivity levels.

The RMD implies that the additional or marginal increase in productivity due to the introduction of more capital (machines) is less.

Each new machine generates less extra output.

Understanding the Poverty Trap

Poverty trap: Poverty is self-perpetuating because poor nations are unable to save and invest enough to accumulate the capital stock that will help them grow.

Disadvantages of Import Substitution Policy

  • Domestic industries can grow accustomed to protection from foreign competition and have no incentive to become more efficient.
  • Import substitution can lead to inefficient industries.
  • After the simpler manufactured imports are replaced by domestic production, import substitution becomes more and more difficult and costly (in terms of the higher protection and inefficiency) as more capital-intensive and technologically advanced imports have to be replaced by domestic production.

Exchange System Collapse

Exchange system: International monetary system.

Reason for its collapse: The US dollar became an international trading and reserve currency, for which the Fed held a monopoly.

Information vs. Knowledge

Information

  • Codified data.
  • Easy and cheap to copy/imitate in time and costs.
  • Public good (freely available).
  • Linear model.

Knowledge

  • Tacit, uncodified components (based on accumulative learning).
  • Difficult to copy/imitate (copying by learning with high costs in time and money).
  • Firms or user-specific good.
  • Interactive model.

Example of information: Drugs, the grammar of a language.

Example of knowledge: Software, documents, products.

Push Factors of Brain Drain

  • Economic factors: Low wages.
  • Socio-cultural factors.
  • Political factors and conflict.
  • Health hazards.
  • Selective immigration policies.

Overall Consumption Disparities

Consumption of the 20% richest: 86%. Consumption of the 20% poorest: 1.3%.

Relative Trade Balance (RTB)

Formula: RTBij = (Xij – Mij) / (Xij + Mij)

Interpretation: RTB compares the trade balance (exports – imports) for a product to the total trade (exports + imports) of that product.

Commercial advantage/disadvantage:

  • RTB > 0: Advantage.
  • RTB < 0: Disadvantage.

Intra-Industry Trade (ITT) and Its Determinants

Intra-industry trade (ITT): Growing trade of goods from the same industry. Heckscher-Ohlin (HO) is a weak explanation.

Determinant Factors of ITT

By Products

  • Product diversification practices.
  • Scale-intensive industries.

By Countries

  • ITT is more important between countries with a similar level of development.
  • And between countries with low trade barriers.
  • A more open economy allows countries to broaden the stock of knowledge because of the possibilities of technological spillovers.

Dunning’s OLI Approach for Multinational Corporations

Ownership: The firm that invests abroad has a competitive advantage over the firms that operate in the country.

Location: Different countries have different factors of endowment, and also country characteristics.

Internalization: Firms expand their operations by acquiring properties of the assets that are abroad.