International trade and economic growth

The main losers in today’s very unequal world are not those who are too exposed to globalization, but those who have been left out.

Kofi Annan


As we indicated in Chapter 1, most of the world’s population is concentrated in the developing countries. In other chapters, we have touched on some of the relationships between international trade and factor movements with respect to the developing countries. However, up to this point most of our focus has been concentrated on the developed countries. This focus on developed countries made sense because most of the world’s trade and investment occurs among these countries. In this chapter, we turn our attention to how international trade affects economic conditions in the developing countries. This is an important topic for two reasons. First, improving the standard of living in the developing countries is arguably one of the most important topics in all of economics. Approximately 5.3 billion people or 85 percent of the world’s population live in the low- or middle-income countries (i.e., developing countries). As a result, the sheer magnitude of people living in poverty makes this an important topic. Second, the relationship between international trade and economic growth has been a controversial subject over the years. Fortunately, economists have learned a lot about the relationship between the two. Armed with this new knowledge, we can now explain the linkages in a straightforward manner.

In the first part of the chapter, we will cover the concept of economic development in more detail and examine some aspects of the universe of countries known as the developing economies. As we will see, the critical factor for these countries is their rate of economic growth. In the second part of the chapter, we will discuss the basic aspects of the theory of economic growth. The third part of the chapter shows how international trade can be used to enhance economic growth. This is followed by a discussion of the various strategies that have been used by developing countries to enhance their economic growth. The final section deals with the role of developed-country governments and international organizations in their efforts to increase economic growth in developing countries.


In this section, some of the aspects of economic development and the developing countries that were omitted in Chapter 1 are discussed. First, we need to describe the concept of economic development. Second, we need to take a closer look at the economics and geography of the developing countries. From there, we will be able to begin to understand why economic growth is so important and how international trade can enhance economic development.

Economic development

Economic development is one of those terms that everyone intuitively understands, for some countries are relatively rich and others are relatively poor. However, these concepts need to be refined somewhat. Economic development is defined as a goal that each country attempts to achieve. The goal of economic development is the attainment of a standard of living roughly equivalent to that of the average citizen in a developed country. A way to measure the average income of individuals within a country is using GDP per capita. However, this measurement is really just a proxy for a variety of factors. In most of the world’s countries, low GDP per capita is associated with a host of other factors that reduce the quality of life. In the poorest countries there is pervasive malnutrition and chronically poor housing. The first goal of economic development is the alleviation of these dire conditions for billions of people. Beyond basic food and housing, the lack of access to basic health care is equally a threat to the lives of billions of people. In many cases, this lack of health care is more acute because of the lack of basic infrastructure to provide amenities such as clean water that can drastically reduce the standard of living. As we saw in Chapter 4, human capital is an important factor in international trade. It is even more important in the context of economic development. In low- and middle-income countries 17 and 38 percent of the male and female population is illiterate, respectively. It is difficult, at best, for people to improve their standard of living without access to basic education.

From the brief sketch above, you can see that economic development is at once an easy but also a complicated concept. This is precisely why there is an area of economics known as economic development. In a single chapter, we cannot possibly hope to summarize a different area of economics. To simplify our analysis, we are going to make an important assumption. This assumption is that the various aspects of economic development all are positively correlated with a country’s GDP per capita. This means that a country with a GDP per capita of $1,000 has on average a higher standard of living than a country with a GDP per capita of $500. This is reasonable, for countries with higher GDPs per capita will normally have higher standards of living in most respects. There is another reason for making this assumption. In international economics, there has been a large amount of research on the issue of international trade and economic development. For the most part, the research has been concerned with the relationship between international trade and the rate of economic growth. In the discussion that follows, we will focus on economic growth and the associated concept of GDP per capita.

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