Question

Explain why export-biased growth may potentially lead to an adverse effect on home country’s welfare. Make sure to describe the measure that you use for welfare in your analyses

Answer 1

How does economic growth impact trade, & vice versa? This is an interesting question that has a rather counterintuitive reply. But to explain , we must define a few terms.

Firstly, we must the terms of trade. It is the price of a nation's exports divided by the price level of its imports. Higher terms of trade are better for a nation, as it means it gets more funds from international trade that it can then utilize to purchase other things (perhaps imports which can expand that economy's options). On the whole, trade will be good always, however, higher terms of trade render it better.

Secondly, an explanation of biased economic growth. Normally economic growth doesn’t impact everything equivalently. Growth which aids production of one product over another is called ‘biased’ towards that product. So import-biased growth is growth which aids production of imported products, and export-biased growth aids production of exported products. We can study how growth is impacted by trade.

Growth doesn’t necessarily ascertain how trade impacts things one way or another, what counts is the bias of that growth. Even knowing this, the intuitive ‘exports good, imports bad’ view might lead us to deem that export-biased growth is sound & import-biased growth is unsound. But the opposite is really correct, let me explain. If growth is biased toward a specific commodity, more of that commodity will be made comparative to other commodities, & the relative supply curve of that commodity moves to the right. But if you move a supply curve to the right price levels go down, and as such the terms of trade are diminished if the growth is export-biased & escalate if they are import-biased. As an outcome, import-biased growth is really better than an export-biased one.

That being said growth is still not quite self-defeating with trade. It is theoretically probable to have self-defeating economic growth, but the growth would have to be so export-biased & comparative demand & supply curves so steep, that it is basically not possible for that to occur.