International Economic Growth

International trade and economic growth are two concepts that go together, because international trade contributes to the growth of a country’s economy in numerous ways. Some of these ways consist of the effects of imports and exports, specialization, increased productivity and improved infrastructure. The exportation of goods to other countries for example can contribute to the growth of the exporting country by increasing the income of that country.

The national economies of some countries are even dependent on and sustained by their exports. For instance, some oil-producing countries depend on the income from the export of crude oil to sustain their nations. Some of these countries actually plan their national budgets based on projection

An increase in the endowment of labour and capital over time causes a nation’s production frontier to shift outward. The type and the level of the shift depend on the rate at which labour and capital grow. If labour and capital grow at the same rate, the nation’s production frontier will shift out evenly in all directions at the rate of factor growth. As a result, the slope of the old and new production frontiers (before and after factor growth) will be the same at any point where they are cut by a ray from the origin. This is the case of balanced growth.

If labour and capital grow at different rates, the outward shift in the nation’s production frontier can be determined.

If both capital and labour doubled, all production possibilities and the PPF would shift steadily out in the same proportion because of constant returns to scale.

If one factor increases relative to the other, the shift of the PPF is inclined in favour of the good that uses that factor more

The Rybczynski Theorem states that the production of the good using the non-growing factor intensively actually decreases. One might expect that an increase in the labour force for example would, by expanding the entire PPF, lead to an increase in the production of both goods, but that is not the case.

The Rybczynski Theorem displays how a change in an endowment affects the outputs of the goods when full employment is sustained. The theorem is useful in analysing the effects of capital investment, immigration and emigration within the context of the Heckscher-Ohlin model.

At constant relative product prices, a small change in factor endowments will increase, relative to both factors, the output of the good making comparatively intensive use of the factor with the comparatively enlarged endowment, and reduce the output of the other good, relative to both factors, provided that the economy remains diversified.

Consider the diagram below, depicting a labour constraint in red and a capital constraint in blue. Suppose production occurs initially on the production possibility frontier (PPF) at point