Question

Is it possible that economic growth can make a country worse off? Discuss with the use of a graph

Answer 1

International trade can affect the level of economic growth of an economy. If the economy has been experiencing unemployment, then growth can come about with the reemployment of factors of production. If factors are fully employed, then economic growth requires new factors of production, or equivalently, technological innovation that allows existing factors to produce more output.When growth results from an increase in the factor used intensively in export goods, then export production will tend to rise relative to the production of import competing goods, and by a greater percentage than the growth in GDP. This is called pro-trade biased growth.When a large country grows, increased output of the exportable or increased demand for the importable good could result in welfare-decreasing price changes. The country's terms of trade could change for neutral as well as biased economic growth. Pro-trade biased growth could worsen the terms-of-trade impact, while anti-trade biased growth could improve it In an extreme case, biased growth could actually make a country worse off. If pro-trade biased growth of an exportable with inelastic demand is combined with a strong terms-of-trade effect, the magnitude of the deterioration in the country's terms of trade can lower overall welfare below the pre-trade level, resulting in immizerizing growth.

Thus

•The impact of growth depends upon its ‘bias’, i.e. does output of one sector grow more, or less, or same as other sector, holding rel.price constant.

•If a nation experiences relatively fast expansion of output of its export good, then the price of its export tends to fall on the world market.

Export-biased growth reduces a country’s terms of trade, reducing its welfare and increasing the welfare of foreign countries.

Cloth-biased growth.

Cloth-biased growth and declining terms of trade.