ECONOMIC GROWTH AND THE PURE THEORY OF INTERNATIONAL TRADE1
| DOI | http://doi.org/10.1111/j.1467-9485.1975.tb00055.x |
| Date | 01 June 1975 |
| Published date | 01 June 1975 |
| Author | Christopher Smallwood |
Scottish Journal
of
Political
Economy
Vol.
XXII,
No.
2,
June
1975
ECONOMIC GROWTH AND THE PURE
THEORY
OF
INTERNATIONAL
TRADE'
CHRISTOPHER
SMALLWOOD
The last few years have seen the development, in a number of important
if
abstruse articles, of a dynamic pure theory
of
international trade.
It
was
begun by Bardhan (1965), and
Oniki
and Uzawa (1965). who extended tc
trade the mathematical model of a growing two-sector neo-classical
economy developed by Uzawa (1961). Stiglitz (1970) went
on
to show thal
in
a dynamic two-country world of a similar neo-classical type, in which
each country has a classical savings function, the factor price equalisation
theorem ceases to hold since at least one of the two countries must inevitably
specialise. Corden (1971) took the process further by providing a highly
suggestive and illuminating analysis of the effects of trade
on
the rate
of
growth of an economy with four sectors.
Johnson
(1971) also shed a great
deal of light
on
the more mathematical parts
of
the literature, mostly with
the help of the tools of comparative statistics, and the literature continues
to grow.
The contention of this paper
is
that although a body of dynamic trade
theory now exists, the seriousness of the implications for the standard static
pure theory of international trade, within which trade problems are gener-
ally considered and analysed, has gone unrecognised.
It
will be demon-
strated that, taken
on
its
own
terms with all the neo-classical assumptions
upon
which it is based accepted, but viewed in a dynamic context, the
orthodox pure theory of international trade provides at best an incomplete
and at worst a misleading analysis
of
the questions with which international
economics
is
concerned. What in fact emerges is that most of the theorems
which make up the standard theory of international trade do not apply:
in the way they are generally presented, to growing economies. Since mosl
of
the world's economies are growing economies, this is clearly
a
serious
deficiency, and the conclusion follows that standard theory provides an
unsatisfactory framework within which to consider the problems
of
trade
policy.
The approach adopted here, however,
is
not intended
to
be merely
01
even mainly a negative one.
In
the first place, an attempt is made to provide
a new diagrammatic analysis of a growing two-sector neo-classical economy
which engages in trade. Growth diagrams originally developed by Hahn
and Matthews (1964) are extended to encompass trade sectors. The advan-
tage
of
this
type
of framework over the traditional geometrical framework
is that it enables the developments in growth theory which have
so
dominated the literature in recent years, to be carried over and applied
11 am grateful to Professor C.
P.
Kindleberger, Professor
R.
C.
0.
Matthews
and
Dr
W.
M.
Corden for their comments on earlier
drafts
of
this
paper.
135
136
CHRISTOPHER
SMALLWOOD
to the theory of international trade. Two important sections of economic
theory are linked together in a fairly simple and convenient form, thereby
establishing the kind of framework which is required for the consideration
of trade questions in genuinely dynamic terms. Positive conclusions are
derived with the help of this framework about the workings of dynamic
neo-classical economies engaging in trade. In the second place, however,
it is demonstrated, with reference to basic theorems in the pure theory
of
international trade, that a fundamental change of view is required when
the questions with which trade theory is concerned are considered
in
a
dynamic setting. In essence, the argument
is
that what are regarded as the
‘results’ of the existing body of trade theory because of its essentially static
nature, emerge in the dynamic context as only ‘initial’ or ‘impact’ effects
which may be augmented
or
may be reversed by the dynamic sequences
to
which they give
rise.
And when these dynamic sequences are worked
through, the view we are left with of the factors governing the Aow
of
international trade, of its impact
on
economies, and
of
the relative desir-
ability of different types of trade policy, is by no means the same as that
received from traditional theory.
The analysis proceeds along the following lines. In Part One, the basic
model is developed of a growing economy which has two sectors, one
producing investment goods and the other consumption goods, and which
behaves in
a
thoroughly neo-classical way. The working
of
the model
is
analysed first under the assumption that
a
constant proportion
of
income
is saved, and then under the classical assumption that all profits are saved
and all wages consumed.
In
Part Two, the basic model is extended to trade.
It is here assumed that the economy is small in relation to the rest of the
world
so
that its terms of trade are given, and again the working of this
open economy is examined assuming first a proportional and then a classical
savings function.
In Part Three, the model is further developed to comprise two countries,
under the familiar Heckscher-Ohlin assumption that the production func-
tions of the two countries are identical.
All
the assumptions commonly
employed
in
the pure static theory are carried over
to
the analysis set out
in
the first three parts
of
the paper, the aim being as closely
as
possible to
provide the dynamic counterpart of the static framework within which
international trade questions are generally discussed,
so
that the two
approaches, static and dynamic, can directly be compared.
In Part Four, the results
of
the analysis are summarised, and its implica-
tions for the existing body of trade theory, which have already briefly been
indicated, are spelled out.
I
THE
BASIC
MODEL
We are concerned with an economy which produces two commodities,
a capital good
(2)
and a consumption good
(C).
Each is produced from
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