Academic journal article Brazilian Political Science Review

Is Trade Good for Development? the Elusive Question *

Academic journal article Brazilian Political Science Review

Is Trade Good for Development? the Elusive Question *

Article excerpt

The sharp growth in international trade in the last fifty years inevitably leads to the issue of its impact on the lives of individuals around the world. The academic community has been pouring over this issue for decades. The responses are varied, and no consensus seems to emerge. In fact, the consensus is that what should interest us is not whether international trade is good or bad for development, but rather what type of trade is good for which country. So, answers to how trade may raise the level of development for particular groups within a country and through what channels may international trade contribute to development are more specific issues that lead to a better understanding of the relationship between international trade and development. Thus, the academic literature in the area has over time undergone an expansion regarding not only the volume but also the delimitation of the objects and research methods. It is a field of study that offers a rich and productive line of research that counts on the theoretical and empirical contribution of various areas of academic knowledge.

What economic theory tells us

One of the few proposals accepted by most economists is that there is gain from trade. David Ricardo, in 1817, claimed that, in the case of countries specializing in the production of goods in which they have a comparative advantage, there is gain from trade. In the so-called Ricardian model, countries have different technologies which create a differential in labor productivity that, necessarily, gives each one a comparative advantage, that is, relative efficiency in producing a good. By specializing in the production of the good in which it has relative production efficiency, there is a reallocation of production factors toward the more productive sector and, consequently, an increase in production. The good that stops being produced is then imported from the country that is relatively more efficient in its production and, therefore, is able to sell it at a lower price. Buying from abroad at a lower price than that which would be paid if it were produced domestically (and selling goods abroad at a higher price than would be obtained in case the economy were closed) generates such a gain from trade. It is all an issue of the efficient allocation of productive resources.

Like Adam Smith, proposing in 1776 that the origin of the wealth of nations is in the division of labor, Ricardo shows that the international division of production leads to the increase of income and, therefore, to increased consumption and the well-being of the population.

This is a very simple theory, with absolute unrealistic assumptions but which marks the beginning of the modern theory of international trade by establishing that there are comparative (and not absolute) advantages which drive trade between different countries. However, complete specialization in the production of a good is not a reasonable result because such a phenomenon is rarely seen.

In the 1930s, with the work of economists Heckscher and Ohlin, there appeared a new theoretical model of trade (systematized in the following decade by Paul Samuelson), wherein the difference between countries is not given by differences in production technology (which is available to everyone), but by differences in the adoption of productive factors. The result of total specialization of the country in the production of the good in which it has the comparative advantage does not occur as in the Ricardian model. However, it is this good that the country will export, and will import the good in which it does not have comparative advantage in production. In other words, as in Ricardo there is the reallocation of production (and of productive factors) toward the more productive sector. This leads to the gain in trade and the increase in well-being.

However, by introducing more than one production factor, which are used in different proportions in the production of different goods, the reallocation of production due to international trade leads to a reallocation of domestic income in this economy. …

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