Modul 32721

International Trade and Economic Development


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The main goal of the course is to study the interaction between globalization and economic growth. The course discusses issues related to economic development, such as growth, trade, and migration, using the most common theories applied both to developing and to developed countries. The frameworks presented in these lecture notes provide a deep understanding of the interdependency between developing and developed economies when goods and factor markets are integrated.

Many of the models illustrated in the course may be familiar to you from your bachelor studies. For instance, the Solow model of economic growth, the only chapter not dealing with international trade, and the canonical trade models have already been discussed in other modules. However, we provide much more detail and we blend the models of international trade with the workhorse growth model. Hence, a sound knowledge of the contents of the previous material is an advantage, but is not a prerequisite. The course presents all the models from scratch and it includes detailed explanations of the relevant mathematical and econometric tools. When appropriate, some recent stylized facts are used to motivate the different frameworks.

A natural starting point for the analysis of economic development is a discussion of economic growth. Hence, Chapter 2 provides a rigorous theoretical treatment of the Solow model and an illustration of the related empirical growth studies. First, we tackle the question, "Why do countries grow?" Capital formation is one potential source of economic growth, but such a growth potential is limited without technological change. Despite being quite intuitive and straightforward, this concept is treated in depth, following the illustration in Acemoglu’s advanced textbook on economic growth. Equipped with the insights derived from the model, we analyze the question "Why have some nations failed to grow?" Indeed, while some countries have demonstrated a sustained economic growth through technological change, some others have remained stuck at low levels of per-capita GDP and have not exhibited any growth. We dedicate one section of the chapter to this puzzle, presenting the discussion as summarized in Acemoglu. The prominent answer given in the literature relies on the existence of institutions. Indeed, the country’s institutional setting provides a safe environment for entrepreneurs to invest. The absence of such an environment may render capital formation inefficient, thus resulting in low rates of economic growth.

Another pillar of economic development is trade in goods and factor inputs. The canonical trade models studied in Chapter 3 are able to rationalize international linkages between developed and developing countries based on technology or endowment differences. Countries specialize in particular industries where they produce with lower opportunity costs. The idea of a comparative cost advantage, which determines international trade patterns, depends on country-specific differences in observable characteristics such as technology (Ricardo) or factor endowments (Heckscher-Ohlin). More recent models focus on intra-industry trade. This implies that countries tend to export goods produced in sectors where they have a relative cost advantage compared to the rest of the world, while they tend to import goods that can be purchased cheaper on the world market rather than domestically. The idea that comparative advantage matters appears to be plausible in the context of developing economies. Indeed, when looking at trade between developing and developed countries, specialization in particular industries is evident in the data. However, a drawback of these classical trade theories is that they are not able to explain why similar countries import and export goods produced in the same industry.

Besides growth and trade, the other face of globalization is international migration, which constitutes the subject of Chapter 4. Indeed, migration movements represent a recurrent pattern from developing to developed countries. Moreover, the “loss” of individuals due to migration away from developing countries has been a crucial topic both for academic and policy debates. Hence, the aim of this chapter is to provide an overview of the international migration movements and the interrelated brain drain phenomenon. Specifically, we answer the following question: “Why do people migrate?" In doing so, we review the theoretical frameworks that provide explanations behind the individual migration decision (that is, at the micro-level). We then proceed by answering the same question from the aggregate perspective, analyzing the determinants of the migration patterns at the macro-level and presenting the associated empirical evidence. Not all individuals from a given population have the same propensity to migrate. Thus, we inquire about who chooses to migrate, stressing the importance of the issue of the immigrants’ “selectivity” for the study of migration. Finally, we offer a brief overview of the economic effects of immigration on the host country.

The final Chapter 5 discusses models that nest both trade and capital formation. These extensions of the Solow growth model include versions with migration, foreign direct investment or trade in goods. The canonical trade models are blended with the workhorse model in the growth literature in order to understand their interactions. Under autarky, the only way to build up a substantial capital stock is through investment. Households face a trade-off between consumption and savings that can be used for capital formation. Moreover, due to diminishing returns to capital and labor, factor income depends solely upon factors' marginal productivity. Once we open those economic growth models to international trade in goods and factors, i.e. migration and foreign direct investments, the pattern of economic growth is substantially different. We have to take the evolution of world prices into consideration, which produces outcomes that are not as straightforward as is the case in more 'basic' frameworks. For example, taking into account the effects of trade on economic growth in developing economies has important repercussions on some of the most important objectives of government’s policy. The last part of the chapter is dedicated to brain drain, where we will show the most recent theoretical framework on the effects of brain drain for the growth of the developing country.

Structure of the course:

  1. Introduction
    • Economic growth
    • The Solow model of economic growth
    • Population growth in the Solow model
    • Economic growth and technological change
    • Human capital in the Solow model
    • Empirical application on institutions and growth
  2. Canonical trade models
    • Ricardo model
    • The Heckscher-Ohlin model
    • FDI and outsourcing in a multi-industry framework
    • Migration in the Heckscher-Ohlin model
  3. International migration
    • International migration
    • Why do people migrate?
    • Who migrates?
    • The effects of immigration on the host country
  4. Trade and growth
    • Economic growth in open economy models
    • Brain drain
Hans-Jörg Schmerer | 10.05.2024