Transmission and Generation of Growth by North-South Trade

Abstract

In the two preceding chapters we discussed the growth of individual open economies. The growth of the rest of the world was not analysed explicitly; instead its demand for the country’s exports was taken to grow at a given rate. In the present chapter we move one step ahead by discussing a two-region model that analyses accumulation and growth in both regions explicitly. This type of model serves two purposes. First, it is a stepping stone on the way to the construction of multi-region models. Second, it gives a summary description of the growth of two regions whose bilateral trade is large compared to their trade with third regions. The system of the developed market economies, ‘north’, and the less-developed ones,’ south’, may serve as a good example. This example has the advantage that it provides illustrative figures for the key parameters that can be used in numerical examples; it also makes it easy to show how some policy questions and issues in the field of trade and development can be discussed in the type of framework developed by us. Moreover, it is quite appropriate to describe north-south trade as trade in indispensable inputs. The north’s imports from the south still consist mainly of raw materials, inputs in the north’s production process for which it usually does not possess perfect substitutes. In return the north exports mostly industrial goods; part of these are intermediates and the finished goods also need further handling in the south. The south lacks the technologies and skills required to produce the goods it imports from the north. Even if the south develops, north-south trade will still retain the character of trade in indispensable inputs, just as is presently the case with trade among industrial countries because of the large proportion of intermediates.