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Economic Growth in a More Integrated World • What is economic growth? • Sources of economic growth • Factor movement • Labor Movements • Capital Movements • Multinational Corporations Economic Growth • Economic growth refers to an increase in the real output of the economy: An outward shift of the production possibilities frontier • Sources of economic growth: » Increases in the quantities of resources » Technological progress • Exogenous and endogenous sources of growth • The income effect of economic growth Trade and Economic Growth • Does (international) trade contribute to economic growth? • Economic growth and terms of trade • The challenges developing countries face in increasingly globalized economy – – – – – Inadequate savings/investments Rapid population growth and relatively small labor force Deteriorating terms of trade Weak “institutions” (economic, political, social) And AIDS The World Bank’s Classification of the Nation States $GDP PER CAPITA BY COUNTRY GROUP 2000 • • • • • Low Income Lower Middle Upper Middle High Income Middle East and N.Afc 426 1,146 4,900 27,609 2,235 World's Household Consumption Pie-1999 4% 18% 78% Low Inc Mid Inc High Inc Source: The World Bank $GDP and Consumption Per Capita-1999 30000 25000 20000 GDP-PC 15000 Cons-PC 10000 5000 0 Low Inc Mid Inc High Inc Source: The World Bank Capital Stock & Labor Distribution 100 90 80 70 60 CapStock 50 Labor 40 30 20 10 0 LowInc Source: World Bank LowerMid UpperMid High The structural differences: • Labor: Labor force participation Female labor force participation Skilled and semiskilled labor • Capital: Physical capital Human capital Infrastructure Physical infrastructure Institutional infrastructure Social/Cultural infrastructure • Capital Stock and Labor Productivity Balanced Growth: More Inputs • Balanced growth: Proportional increases in labor and capital Food o C1 U1 Co P1 Uo Po Cloth Will balanced growth necessarily increase welfare? • Population increase vs. labor force increase • The effect of growth on terms of trade – The small country case – The large country case – When a number of small countries exporting the same product grow simultaneously Growth Effects • • • • • Income Effect Price or Terms-of-trade effect Effects on trading partner Trade effect Production effects • In the case resource growth • In the case technological progress Growth and Terms of Trade F U2 (Immiserizing Growth) Uo TT: (Pc/Pf) U1 TT’: (Pc/Pf)’ P2 (Pc/Pf) > (Pc/Pf)’ P1 Po TT’ TT o TT C Growth and Terms of Trade F U2 TT: Pc/Pf TT’: (Pc/Pf)’ (Pc/Pf) > (Pc/Pf)’ U1 Uo P2 P1 Po TT’ TT o TT C Factor Mobility • Recall factor price equalization theorem • Labor mobility: migration/immigration • Capital mobility: » Portfolio investments » Direct investments » Multinational corporations Horizontal MNEs Vertical MNEs Conglomerates A Simple Model Wa Wb S S’ Tax wao Wb1 Wb1 wbo D’:VMPLa(1-t) D:VMPLb D:VMPLa Ob Oa Total Labor A Simple Model ra S rb S’ rao rb1 ra1 rbo D:VMPKb D:VMPKa Ob Oa Total Capital Multinational Enterprises An MNE is a firm that owns, controls and manages production or service facilities in two or more countries » Horizontally integrated MNEs » Vertically integrated MNEs » Conglomerates • Capital arbitrage • The location theory • Bypassing trade barriers: R&Ds and FDIs » Are MNEs substitutes or complements to trade? » Do MNEs facilitate transfer of technology? » Do MNEs exploit and abuse their host countries? MNEs and Economic Development • Saving, investment and economic growth