Abstract The following paper explains the relationship between international trade and economic growth. It also gives a brief description of international trade and economic growth. Different scenarios around the world were discussed and the impact of increased globalization on economic growth was assessed. Abstract The following paper explains the relationship between international trade and economic growth. It also gives a brief description of international trade and economic growth. Different scenarios around the world were discussed and the impact of increased globalization on economic growth was assessed.
RUNNNG HEAD: Microeconomics
Microeconomics
International Trade
All the countries in the world are dependent on each other nowadays. Countries need natural resources that are not present in their homeland or they may also be in need of some finished goods that they don't produce. This interdependency gives a beginning to trade between countries. The notion of international trade has become quite common nowadays as all the countries are participating in it. In addition to fulfilling the requirements of the country, international trade also increases overall efficiency of the production of a good. As some countries have the resources to produce certain goods at a lower cost than other countries. So, that cost efficient country can be given the chance to produce that good for other countries as well so that the overall cost of that product falls. The decision of international trade is undertaken by economies keeping either comparative or absolute advantage in mind. (Lipsey and Harbury, 1994)
2. Economic Growth
Economic growth is referred to as the increase in the full production potential of a country. This means that a country will have more production and employment options available growth is considered to be a macro and microeconomic issue. It can be shown by an outward shift in the production possibility curve of an economy. This means that an economy can produce more of everything or some products without reducing the production of other goods. Numerous factors can cause economic growth in a country and international trade is one of these factors. (Lipsey and Harbury, 1994)
3. Trade and Economic Growth
Trade and economic growth share a positive relationship. Recently, there has been a visible increase in the amount of international trade and many countries are enjoying good returns and economic growth as a result of international trade. This fact is supported by the economic growth of Japan. By the end of 19th century, Japan was one the poorest countries in the world. In the next 100 years, Japan embraced international trade and started to export the goods it was able to produce at a lower cost. As a result, Japan was able to maintain a growth rate of 2.81% each year. This means that Japan was able to increase its producing potential by 2.81% every year and nowadays it has got in line with one of the richest countries in the world. (Andersen and Babula, 2008)
Countries can experience a technological growth as well by the virtue of international trade. Developing countries can exchange goods that they specialize in for capital goods which can then be used to industrialize the economy. As quoted in the research of Andersen and Babula, "When a country exports wheat and imports steel, the country benefits in the same way as if it had invented a technology for turning wheat into steel." (Andersen and Babula, 2008) (Ulasan, 2012)
In addition to that, countries can also benefit from the inflow of investment in the country. It can also harness the potential of existing investment in the country. International trade increases the production possibilities of an economy and thus international investors are attracted towards the country. Moreover, the existing investors in the country may also take initiative and invest more as the economy will be giving more returns. These higher returns are also a benefit that an economy derives from international trade as international trade causes the demand for the economy's product to increase as they enter the international markets. As a result, new employment opportunities generate in the economy and more and more revenues are brought in. The overall growth of the economy also increases. (Skipton, 2008)
The most important case that shows the impact of international trade on economic growth is the case of China. China became a member of World Trade Organization in 2001 and since then it started to promote international trade. It reduced its tariffs and other barriers so that the trade could be liberalized. Different policies were introduced as a result of which, the tariff rate was reduced from 56% in 1982 to below ten percent in 2008. Policies were targeted to promote the trade in china and as a result, china experienced rapid economic growth as well. The following graph shows china's trade performance from 1978 to 2008: (Sun and Heshmati, 2010)
(Sun and Heshmati, 2010)
As we can see from the graph that china's trade performance of china has improved significantly since 1978. The value exports of china have increased from below 200,000 million dollars in 1978 to 1,400,000 million dollars in 2008. This shows that china's exports have increased by 700%. On the other hand, the imports have also grown but at a slower rate. After 1994, the imports never exceeded the exports and this is the reason for the trade surplus that china enjoys. From 1978 to 2008 the trade volume of china has increased from 20.64 billion dollars to 2.56 trillion in 2008 which marks an annual trade growth rate of 18.1%. (Sun and Heshmati, 2010)
As mentioned earlier, international trade has a positive impact on the economic growth and Chinese economy also showed this impact as the trade volume increased, the Chinese economy also progressed. The following graph illustrates the relation: (Sun and Heshmati, 2010)
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