Role of Trade and Foreign Investment
Since the early days when people migrated from Europe to North America, there was an important role played by international trade to the economy of North America. Émigrés and colonists highly depended on international trade especially in trade companies. The trade companies provided products all over the continent and the surplus availed to the wealthy European markets. An important driver of gross domestic product is foreign investment and international trade (Marjit, Sugata and Biswajit, 2016, 277). The largest economies in the world are also the largest importers. Such economies include Japan, Germany, U.S, and China.
Myrdal endogenized progress in technology by establishing links between technological progress and capital investment (O’Hara, 2008, p.378). The drivers of technological progress are the principle of cumulative and circular causation. The manufacturing sector brings a lot of economic returns. Myrdal also states that the most significant factor of economic development is industrialization. He added that the countries which concentrate on manufacturing activities (activities with high returns) become rich (O’Hara, 2008, p.378). He also argues that increased returns do not only involve economies of scale but also on the learning activities from the process of production of commodities.
Kaldor invented a highly realistic and coherent account of the cycle of businesses and trade in general. His theory was constructed using non-linear dynamics. Hicks’s and Samuelson’s theories were similar to that of Kador’s since they all aimed at understanding the cycle (O’Hara, 2008, p.379). It is important to note that Kaldor used the capital stock as one of the major determinants of the trading cycle. Kaldor also stated that foreign investment is negatively dependent on accumulated stock capital and positively on the income earned. He also argued that investments highly depend on income growth. During periods of growth in income, demand also increases meaning that investments are also supposed to rise. The negative relationship in capital stock factors is as a result of companies which accumulate a large productive capacity which does not motivate them to invest in more (Pacheco-López, 2014, p.394). Kaldor integrated Roy Harrod’s ideas to explain the unbalanced growth in economy.
Kaldor also made an assumption that savings functions and investments are non-linear. He explained how the troughs and peaks of the cycle have to make shifts in different ways. He also further explained that during recessions different people cut savings so that they may maintain their living standards (O’Hara, 2008, p.381). He also showed how during high income people, most people benefited. During the trough, there is excess capacity, thus, companies and individuals make little foreign investments. At the cycle’s peak, the costs of production are quite high thus discouraging investments (Thirlwall, 2014, p.344). As a result, the economy develops non-linear dynamics which drive the cycle of businesses.
Kaldor also assumed that companies that set wages have less power than those that set prices thus prices tend to have a higher increase rate than the wages. It also means that wages rise slower than profits (Pacheco-López, 2014, p.396. Kaldor also stated that different savings propensities of workers and capitalists lead to increased savings (Pacheco-López, 2014, p.396). During depression, prices of commodities decrease faster than those of wages.
Krugman uses a model where trade is enhanced by economies of scale rather than technology or factor endowments. According to Gehrke (2015, p.338), this approach differs from that of classical economists since it assumes that economies of scale are external to companies. As a result, markets stay perfectly competitive. According to Krugman model, it is assumed that scale economies are internal to firms. The market that emerges from such an economy becomes monopolistic. In an economy where there is a single factor of production which is scarce, it is assumed that the economy produces a lot of goods (Bewley, 1987). Demand increases since the number of people ordering the products also increases. In such an economy, it is also assumed that the same amount of money is spent on producing all commodities. The production of commodities is equal to the total consumption of the good.
According to Krugman, economies of scale play a major role in determining the market structure. If scale of economies is not exhausted, they become inconsistent with the model of standard competition. Krugman’s approach uses the chamberlain theory where monopolistic competition occurs (Marjit et al. 2006, p.276). The Chamberlian approach is effective since it provides a simple way of examining different issues occurring in the international economy (Bewley, 1987, p.312). By asserting that new entrants can maintain a monopoly, Krugman was of the view that most firms had a downward-sloping demand curve and that existent of many small monopolists would limit the monopoly profits (Bewley, 1987, p.312).
The H-O-S model shows that different factors of production are available in different countries but there is a major difference in how they are applied to produce commodities. It also assumes that factors of production used by different countries are perfectly mobile between different countries (Gehrke, 2015, p.339). In this approach, the same type of technology is used by different countries. Commodities produced in different countries have unequal factor intensities where differences are maintained for various price ratios. It is also important to note that the preferences and tastes of individuals in different countries are similar in this model (Gehrke, 2015, p.340). It, therefore, means that demand of products between the different countries is also similar. The mainstream trade models differ from those of classical economists in terms of economies of scale, application of factors of production and technology used.
Finally, a look into Singer’s research shows his perception of the trade fluctuations in under-developed countries. Singer notes that under-developed countries are the most affected by fluctuations in trade (Brecher, 1982, p.182). The capital-intensive nature of companies in under-developed countries makes them vulnerable to economic fluctuations, which mostly stem from developed nations. Singer also advocated for import substitution policies as a method to help manage the irregularities in trade (Brecher, 1982, p.183).
Works Cited
Gehrke, Christian. “Formalizing “external economies”: Viner, Chipman, and Krugman.” Œconomia. History, Methodology, Philosophy Vol.5, No.3, (2015): 338-362.
Bewley, Truman F. Advances in Economic Theory: Fifth World Congress. Cambridge UP, 1987. Print.
Brecher, Richard A., and Ehsan U. Choudhri. “Immiserizing investment from abroad: The Singer-Prebisch thesis reconsidered.” The Quarterly Journal of Economics Vol.97, No.1, (1982): 181-190.
Marjit, Sugata, and Biswajit Mandal. “Finite Change—Implication for Trade Theory, Policy and Development.” Development in India. Springer India, 2016. 274-282.
O’Hara, Phillip Anthony. “Principle of circular and cumulative causation: Fusing Myrdalian and Kaldorian growth and development dynamics.” Journal of Economic Issues Vol.42, No.2, (2008): 377-387.
Pacheco-López, Penélope. “A new interpretation of Kaldor’s first growth law for open developing economies.” Review of Keynesian Economics Vol.3, No.1, (2014): 394-398.
Thirlwall, A. P. “Kaldor’s 1970 Regional Growth Model Revisited.” Scottish Journal of Political Economy Vol.61, No.4, (2014): 343-347.
