Role of Trade in Economic Growth

‘International Trade and Economic Growth in Developing Countries’ Neil Foster
• Introduction by facilitating the transmission of technology across borders. •

It has long been thought that international trade can increase a country’s growth rate. Until recently however the argument for free trade was based upon static considerations of specialisation and the international division of labour. While shifting production more in line with one’s comparative advantage should raise income per capita, it does not have any implications for long-run growth. Endogenous growth theory however has shown that outward orientation can potentially affect a country’s growth rate through several channels. In these models however there is no presumption that trade is good for growth. Growth can be lower under free trade, if a country’s comparative advantage lies in certain goods. This implication may be particularly relevant for developing countries (LDCs). •

What Role does Trade Play in LDCs Growth?

In LDCs it is likely that R&D activity is limited. Trade can still improve a country’s growth rate however by allowing the

importation of capital and intermediate goods and by facilitating the transmission of

knowledge. Such knowledge can be used to adapt and imitate developed countries

products. •

Why Study Trade and Growth?

Despite a vast empirical literature there is still no general consensus concerning the benefits from trade and the mechanisms through which these benefits are realised. The existing measures of openness have been criticised for

What Causes Growth in Endogenous Growth Models?

a number of reasons. They are not highly correlated with each other, they potentially measure a number of macroeconomic policies and the evidence concerning the direction of causality is not conclusive. Also the measures developed tend not to relate to the mechanisms through which endogenous growth theory suggests are important. Furthermore, empirical testing of...