How Might the Type of Good Exported Affect the Growth Rate of a Country - Essay Example

? Number: How might the type of good exported affect the growth rate of a country? Exporting entails the production of goods and services in one country and trading them in another country through international trade. A country that is selling its products and services abroad is referred to as the exporter while the country purchasing products and services is called the importer. Importing is the acquisition and sale of goods from another nation and trading them within the country. A country may be in a better position to export a certain product or services for various reasons. A country can export products and services if it is the single supplier of a certain product, particularly when it has access to natural resources that other are not endowed with. Some countries are also in a better position to make a certain product at a fairly lower cost than other countries .The reason is that a country may have the absolute advantage in producing a certain product over others. Absolute advantage in international trade implies that a country can produce a product at a cheaper price than others. The concept of balance of trade results from the import export business. Balance of trade is the difference between the quantity of exports and the quantity of imports. When exports exceed imports, trade surplus results while a trade deficit results when the quantity of imports exceeds that of exports. There exist two types of final products for export. Traditional products, which are produced using labour intensive skills, and high-tech products which are made using differentiated intermediate goods (Andersen & Babula, 2008, p. 10). When a country engages in international trade, it registers economic growth especially when its products are in high demand. Factors determining export led growth include demand, competitiveness and the rate of exchange. Growth is initiated by an increase in demand for exports. If the spread effects are potent as the export sector grows so the domestic sectors will too. Spread effects refer to prosperity flowing from exporting products and services in international trade. The competitiveness of a country’s product increases the demand for exports. This implies that the demand for what a country sells increases. Depreciation in the rate of exchange makes exports more competitive, thereby increasing demand. Depreciation of the exchange depends on the elasticity of demand for exports (Felipe, 2010, p. 260). The depreciation of a country’s currency in international trade depends with the changes in demand of a country’s exports. Opening up trade can improve the allocation of resources, eventually changing the production function upwards and increasing the per capita income level. Production function relates the output of a country to the amount of inputs. Input in this case refers to capital and labor as factors of production. Production function also refers to the relationship in which output increases as more units of input are employed in production. There is a relationship between international competitiveness if a country’s export and economic growth. Keynesian perspective explains this kind of growth as being demand-driven and that exports make up the exogenous component of collective demand that propels income growth. Exogenous component in this context refers to external/foreign/international components that drive internal growth of a company. Additionally, a fast growth of exports and output tends to set up a virtuous circle of growth through the connection between output growth and production growth. From a neoclassical endogenous growth point of view, a connection between exports and growth may be vindicated since the opening up of trade may be an incentive to a higher rate of endogenous technological change. A study conducted by Maizels in 1963 established a noteworthy relationship between the relative growth of the prime industrial nations and their share of the global export market in manufactures (Meliciani, 2001, p. 53). Manufactured exports have led to rapid economic growth among countries like the Asian tiger South Korea. There is a growing body of research that has established positive linkages between economic growth and manufactured exports. Openness to international trade and strong export growth has been noteworthy contributors to fast economic growth. For instance, China’s accession to the World Trade Organisation has made China to fully assimilate into the global system and seize the benefits of its abundant labour comparative advantage. Additionally, China exports its manufactured goods that are in high demand, thus enjoying fast export led growth through its double transition. Yao Yang of the University of Peking attributes China’s fast growth over the last decade as being mainly driven by exports (Yao, 2011, para. 3). The nature of exports (manufactured goods in this case) contributes to economic growth through various channels. One is that exports offer the foreign exchange essential to pay for imported raw materials and investment assets goods. Exporters are in a better position to pay for a vast range of imported goods including capital goods. Secondly, exporters of manufactured goods may focus their production to a greater extent than is possible under import substitution. Developing nation exporters may access the worldwide production and distribution systems, including for superior products, depending on their comparative merit in labour intensive operations. For instance, Malaysia was able to develop an electronic sector in the 1970s, yet it did not have special skills in electronic production at the beginning. Malaysia utilised its labour intensive operation to assemble and test computer chips, though it was not able to design them. As a result, United States manufacturers shifted their most labour intensive production processes there. Intel investment in Malaysia swiftly moved Malaysia from a third world country into a world class producer. Manufactured exports make it possible for exporters to sell to a larger market than under import substitution, where the size of the market is constrained to the size of the domestic economy (Radelet, 1999, p 8). Additionally, manufactured good/high tech exports promote technological progress (which is a type of economic growth) in contrast to export of traditional goods. Fast growth in high tech exports necessitates close ties with multinational firms that offer intermediate inputs, capital goods, and technology and export markets (Andersen & Babula, 2008, p. 12). These ties present strong means through which firms may learn by doing, resulting in technological progress. This can only happen in open trade as no country can generate all the superior capital products and technology required for high quality investment undertakings by itself. For instance, employees and managers in Malaysia are more skilled in areas of the production chain than they were in the 1970s. The reason is that they have the way in to the newest technology present in the global markets. Apparently, wages for employees in the manufacturing division have increased considerably. When workers income increases, the standards of living also increases, which is an indicator of economic growth. Exports of manufactured products also have spillover benefits on other sectors of the economy like infrastructure. In the virtuous circle, fast export growth eases the acquisition of capital goods and technology transfer that propels economic growth. Rapid economic growth offers the means to finance investment in physical and human capital that sustains more fast export growth. The nature of products a country exports has an effect on the export led growth. This result from the relationship that exists between export led growth and the balance of payment constraint. Export growth plays a vital role in mitigating a country’s balance of payment constraint on demand. The primary component is that exports are the single element of demand whose growth concurrently relaxes the bop constraint. In the same manner, the nature and superiority of a country’s export basket is a very good predictor of its future growth. Balance of trade constrains the entire growth rate since in the long run nations aim at having a balanced current account with bop equilibrium on current account unless it can finance always increasing deficits. Developing countries mostly suffer from BOP constraints as a result of their nature of exports such as traditional products that are not value added. As such, developing countries require developing the capacity to export in order to pay for full-employment imports, that is, the value of imports that would arise if resources were fully exploited. This implies, in other words that exports ease the BOP limitation compelled by the import requirements of fast growth. If a country is below its growth productive potential and its supply limitations are not binding, then its growth rate will be determined by the growth of demand (Felipe, 2010, p. 277). In conclusion, the nature of products a country exports affects its economic growth. Exporters of high tech products like China, Malaysia and Japan have registered high economic growth since they are better placed to serve a wider market. Exporters of manufactured products have foreign exchange at their disposal that they use to finance imports, foreign direct investments and capital goods. Developing countries that mostly export traditional goods always grapple with bop deficits that have to be constantly serviced. These funds could be used for economic activities that would result in economic growth. Bibliography Andersen, L. & Babula, R. (2008). The link between openness and long-run economic growth. Journal of International Commerce and Economics. Accessed on 28 February 2013, from: http://www.usitc.gov/publications/332/journals/openness_growth_link.pdf.1-15 Felipe, J. (2010) Inclusive growth, full employment, and structural change: Implications and policies for developing Asia. 2nd ed. London: Anthem Press. Meliciani, V. (2001) Technology, Trade and growth in OECD countries: Does specialisation matter? London: Routledge. Radelet, S. (1999) Manufactured exports, export platforms, and economic growth, Accessed on 28 February, 2013 from: http://pdf.usaid.gov/pdf_docs/Pnach178.pdf. 1-39 Yao, Y. (2011) China’s export-led growth model, East Asia Forum, Accessed on 28 February 2013, from: http://www.eastasiaforum.org/2011/02/27/chinas-export-led-growth-model/ Read More