International Economics II Assignment 1 Mahek Chhaya (5) Abhishek Ghosh (8) Jash Shah (27)

Terms Of Trade Effect: If growth regardless of its source or type expands the nations volume of trade at constant prices then the nations terms of trade tend to deteriorate. On the other hand if growth reduces the nations volume f trade at constant prices, a nations terms of trade tend to improve. This is referred to as the Terms of Trade effect of growth. Wealth Effect: The wealth effect refers to the change in output per worker or per person as a result of growth. A positive wealth effect by itself tends to increase the nations welfare otherwise the nations welfare tends to decline or remains unchanged. If the wealth effect is positive and the nations terms of trade improve as a result of growth and trade the nations welfare will denitely increase. If they are both unfavourable the nations welfare will denitely decline. Immiserizing Growth: Even if the wealth effect by itself tends to increase a nations welfare the terms of trade will deteriorate so much as to lead to a net decline in a nations welfare. This case is termed as immiserizing growth.

Japan

Japan%Gross%Domes)c%Product%
5.E+12'
Gross%Domes)c%Product%($)%

5.E+12' 5.E+12' 5.E+12' 4.E+12' 4.E+12' 4.E+12' 4.E+12' 4.E+12' 2000'2001'2002'2003'2004'2005'2006'2007'2008'2009' Year% Japan'Gross'Domes:c'Product'

Japan$Per$Capita$GDP$
45000" 40000" 35000" 30000" 25000" 20000" 15000" 10000" 5000" 0" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" Year$
Per$Capita$GDP$($)$

Japan"Per"Capita"GDP"

Japan&Exports&
9E+11" 8E+11" 7E+11" 6E+11" 5E+11" 4E+11" 3E+11" 2E+11" 1E+11" 0" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" Year&
Value&of&Exports&($)&

Japan"Exports"

Japan&Terms&of&Trade&
140"
Terms&of&Trade&(%)&

120" 100" 80" 60" 40" 20" 0" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" Year& Japan"Terms"of"Trade"

As we can see from the gures plotting Japan's Gross Domestic Product, Per Capita GDP, Japanese Exports and Japanese terms of trade from the year 2000 to 2009, we can see that up to 2007 the GDP increases at a faster rate as compared to the per capita GDP which shows a wavy movement. Japanese exports as well as terms of trade show a similar pattern of growth as the movement in the real GDP. The per capita GDP in 2007 ($34364.98) is lower than the per capita GDP in 2000 ($36836.90). Thus even though the economy has grown by about 11% from 2000 to 2007, the per capita GDP has reduced. Similarly although Japanese exports have increased substantially between 2000 to 2007, no real effect on the per capita GDP can be seen. The paradox in the Japanese situation can be seen after 2007 up to the year 2009 when the real GDP (the wealth effect) falls, exports fall, the terms of trade (terms of trade effect) improve then drop but the per capita GDP rises. Ideally a positive relationship can be seen between the wealth and the terms of trade effect and the welfare of the nation measured by the per capita GDP, but in this case a negative relationship can be observed. Thus it can be said that with an increase in growth and trade the per capita GDP has fallen and the welfare of the Japanese people as a whole has decreased. Therefore, empirically the Japanese case does not follow the traditional theories linking growth in trade and welfare.

USA

USA%Gross%Domes)c%Product%
Gross%Domes)c%Product%(billions%of%$)%
13,500$ 13,000$ 12,500$ 12,000$ 11,500$ 11,000$ 10,500$ 10,000$ 2000$ 2001$ 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ Year% USA$Gross$Domes7c$Product$

USA$Per$Capita$GDP$
50,000"

Per$Capita$GDP$($)$

40,000" 30,000" 20,000" 10,000" 0" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" 2010" Year$ USA"Per"Capita"GDP"

USA&Exports&
Value&of&Exports&($)&
2E+12" 1.5E+12" 1E+12" 5E+11" 0" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" Year& USA"Exports"

USA&Terms&of&Trade&
100"

Terms&of&Trade&(%)&

80" 60" 40" 20" 0" 2000" 2001" 2002" 2003" 2004" 2005" 2006" 2007" 2008" 2009" Year& USA"Terms"of"Trade"

Looking at the four gures which represent the Gross Domestic Product (GDP), the exports, the terms of trade and the per capita GDP of the USA from the year 2000 to 2010, it can be seen that as the terms of trade, the exports and the GDP increase the per capita GDP also increases, therefore it follows a positive relationship with the other three variables unlike other countries like Japan. The USA from the decade beginning with the year 2000 has grown at a steady rate and so have its exports (not accounting the brief dip in the year 2008-2009). Its terms of trade on the other hand have not have had a steady growth with them deteriorating from the year 2000-2007 and a brief but steady increase from there on. Not taking into account the year on year trend while observing the GDP, GDP per capita and the terms of trade it can be said with a fair amount of condence that with an increase in the volume of trade (exports are increasing and so are the terms of trade), causing a positive terms of trade effect and a positive wealth effect shown by the considerable growth in the real GDP, the overall welfare of the American Citizen has increased. Thus empirical data of the USA economy suggests that growth in trade indeed leads to a growth in welfare. Sri Lanka From 2000 to 2001 there is a decrease in the real GDP showing positive wealth effect and TOT is increasing. And we see that per capita GDP i.e welfare is increasing which implies that the positive TOT effect is much greater than the negative wealth effect. From 2001 to 2004 there is there is a steady increase in welfare. However in this period the TOT is constantly falling and the real GDP is increasing that means the wealth effect is positive. This implies that the positive wealth effect is much greater than the negative terms of trade

effect. From 2004 to 2005 welfare is increasing with the terms of trade increasing as well as the real GDP which means that both the effects are positive.from 2005 to 2006 TOT is negative however the wealth effect is positive by a larger proportion and hence a positive welfare. Similiarly from the year 2006 to 2009 the empirical evidence satises the theory.! ! ! ! ! ! ! ! ! ! ! South Africa In this case as well the evidence does not anywhere defy the theory and very much sticks to it. India 1. Looking at the relation between the two variables tot and volume of exports one may conclude after the study of the theory that the relation between the two is one that is inversely propotionate but in the years 2001-2001, 2007-2008 and 2008-2009 we see that there is a direct relation between the two which goes against standard theory. 2. India seems to have a positive wealth effect considering that the GDP is rising in every given time period. 3. The TOT effect is seen to be positive in some years and negative in some cases, due to unavailability of data the net effect can be looked at only from the year 2006. 4. In 2006-2007 the wealth effect is positive. The pcy is seen rising in spite of a decreasing tot as the wealth effect is stronger than the tot effect. 5. In 2007-2008 the pcy is seen to rise on account of a positive wealth as well as tot effect. 6. 2008-2009 is similar in manner to that of 2006-2007 as a stronger positive wealth effect is seen to pull up the pcy gures in spite of a falling tot. China 1. Till the year 2005 china sees the expected inverse relation between tot and volume of exports. The next three time periods till 2008 one sees both tot and volume of exports on a rise and then both fall in 2008-2009. These four time periods show a direct relation between the two variables and hence form an exception to the standard theoretical belief. 2. From time periods 2001-2002 to 2004-2005 a similar effect is seen where a positive wealth effect outweighs a negative tot effect and hence has an increasing effect on the pcy. 3. The next three time periods we see that the rise in pcy is on account of a positive wealth and tot effect. 4. 2008-2009 is seen to follow a similar trend as the rst four time periods. Bangladesh In this case we see that from year 2000 to 2001 the TOT effect is positive and so is the wealth effect.i.e the real gdp is increasing however the welfare decreases in absolute terms which is defying the theory that with both the effects being positive welfare increases. Till the year 2004 the real gdp increases i.e the wealth effect is positive and the TOT is constant for two years otherwise it shows a positive effect. And hence it leads to an increase in welfare. For the subsequent years as well the empirical evidence favors the theory. Germany In case of germany too we see the evidence going against the established growth theory. The welfare decreases in spite of a positive wealth effect and TOT effect. The following the wealth effect remains constant i.e the output per worker doesnt change while the TOT effect is positive and we see that the welfare is increasing too. From year 2002 to 2003 we

notice that the country witnesses immiserizing growth as both the TOT effect as well the wealth effect are negative still there is a marginal increase in welfare.for the following years the evidence shown by the country satises the theory. From 2008to 2009 the welfare decreases in absolute terms with a negative wealth as well as TOT effect. France From the year 2000 to year 2002 the TOT remains constant with the value of exports and imports increasing almost proportionately. However the real gdp increases by little amounts i.e the wealth effect is positive and we notice growth in welfare.for the next two years TOT declines while the real gdp is increases and so does the welfare which implies the positive wealth effect is much stronger. Overall the country very much follows the established growth theory. UK In this case we see from the years 2000 to 2004 the TOT effect is negative while the wealth effect is positive and the welfare is increasing which implies that the positive wealth effect is much stronger here than the decreasing TOT. Generally the country witnesses a rise in welfare and then an eventual fall in welfare because the TOT effect was positive however the fall in real gdp the welfare effect is negative and hence it is much stronger. The country overall adheres to the growth theory.