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Impact of technology in International Trade

Submitted By
Sahili V. Totale 2016B3A20544P
Ayushi Agrawal 2016B3TS0951P

Submitted to:
Dr Geetilaxmi Mohopatra

in partial fulfilment of the course
International Economics

Birla Institute of Technology and Science,Pilani
23rd November, 2018


We would like to express our gratitude to all those who have helped us directly or indirectly to complete this report.

Firstly, we would like to express our gratitude towards the institute, Birla Institute of Technology and Science (BITS) – Pilani, Pilani Campus, for granting us this wonderful opportunity of studying and working on this wonderful project.

We are deeply indebted to Dr Geetilaxmi Mohopatra, instructor in charge, International Economics, for teaching and guiding us with the topic as well as knowledge, and ultimately providing us with an opportunity to make and present this report.

Thank you.

Table of Contents
Abstract ……………………………………………………………………………….3
Introduction ……………………………………………………………………………4
What is technology? …………………………………………………………..4
Literature review ………………………………………………………………………5
Factors affecting trade…………………………………………………………5
Technological Advancement and economic growth. …………………………………9
Economic Growth and international trade ……………………………………………11
Conclusion ……………………………………………………………………………12
References ……………………………………………………………………………13

The economic growth of a country can be estimated by the international trade it engages into in a period. The import, export and the percentages of trade in the GDP are the few measurements which can be taken into account. On the other hand, the technological advancements and innovation for a country define its growth in terms of the technology. In the report, we wish to relate the international trade of a country with the technological advancements in that country and establish a theoretical relationship between the two. We start off by giving the introduction to the topic followed by the literature review and relate it to the concepts covered in our course. Then we explain the international trade because of technology and then conclude by citing some references.

Technology plays a vital role in the development of the countries. it’s crucial every for developing and developed countries as technology progress will alter them to strengthen their economy and fill in the world markets. The international trade theory highlights the importance of technological innovation in explaining a country’s international fight. Consistent with Schumpeter (1883-1950), economic development could also be a dynamic technique deriving from business and trade. With the development of technology, high-tech merchandise will become the key players in international trade. traditional|the standard} primary merchandise and normal manufacturing merchandise will account for fewer within the international trade business than before. Technological changes like those related to transport and communication are the thrust in intensification in economic interdependence between nations. Bigger economic interdependence can facilitate the fast international diffusion of the results of R&D and alternative technology investment in leading-edge countries.

What is Technology?
Technology as studied by economists is that the tools of study of a competitive market. Thus, if technology is additionally studied like many various artifact, and if markets were freely in operation and ideal competition prevailed, then no disadvantage of technology transfer would cause. Technology would be merely transferred and used. The efficiency of its use would only be a matter of guaranteeing the conditions for economical resource allocation among the context of exogenously determined technological alternatives. Technology policy would solely include government support of institutes that collect, process, and propagate technical info, even as a provision of public product. This conception descends from 2 assumptions :
(i) technology consists merely of a group of techniques totally delineated by their ‘blueprint’;
(ii) all techniques square measure created within the developed countries, from that they flow at no or low prices to developing countries.

However, many authors recognised, already many decades past, the special options of technology and technological modification, resulting in a perception of technology in additional complicated terms. Thus, initial of all, no existing technique is totally expressed by the add and combination of their material inputs and therefore the statute info regarding it. In fact, a lot of of the data regarding the way to perform elementary processes and regarding the way to mix them expeditiously is silent, not feasible embodied, nor codifiable or without delay transferable, and ‘a firm won’t be able to recognize with certainty all the items it will do, and definitely won’t be able to articulate expressly however it will what it will.’
This means that technology is not simply a set of blueprints or of instructions, that if followed exactly will always produce the same outcome. Although two producers in the same circumstances may use identical material inputs with equal information available, they may nonetheless employ two really distinct techniques due to their different understanding of the tacit elements. Thus, techniques are sensitive to specific physical as well social circumstances.

Literature Review
Phase 1(early 1950s): According to Heckscher Ohlin Theory for the imports and exports of the country, it states that the country will export those commodities whose production requires the intensive use of the nations’ relatively cheap and abundant factors of production and will import those commodities whose production requires the use of relatively expensive and scarce factors, given both the nations use same technology, incomplete specialization, equal tastes, constant returns to scale and factor mobility within each nation.Although it gave an adequate explanation of the cause of trade and acquired a central position in pure theory of international trade, stillit suffers from criticism such as in demand reversal argument, leontief paradox and factor intensity reversal. The illustration for the same are shown below:

Due to the various criticisms of the H.O Theory, modern trade theories of posner and raymond vernor were developed which assumes that the nations do not use the same technology. Posner developed Imitation lag hypothesis which states that the technological change is a continuous process. There is a time lag between the introduction of imitation by other nations called the imitation gap and lag between the development of new good and creation of demand for that good in thee other country called the demand lag.

Phase 2(1960s): The theory given by raymond vernor attempts to explain the tendency for the production of new goods to be concentrated in richer countries early in the life of product, but to move to other countries in the future. The innovation of any good is a risky investment and this risk can be only borne by the richer countries. He defined five stages as new product phase, product growth phase, product maturity phase and product decline stage.
Table 1: Factors explaining trade
Grupp and Münt(1998) To study internationalcompetitivenesschanges throughhigh-technology andleading-edge technologysectors, definingdifferent patentsscopes Market share Patents/ employment:: inUSA, EPO,and (USA,Japan and theEU) Technological output expressedthrough copyright is more significantin explaining trade of high technologythan leading-edge technologysectors. Highly importantrole of SIN
Barcenilla andMontavez (2000) Analysis of Spanishforeign competitivenessdeterminantsregarding the EUfrom a dynamic pointof view Exports share Relative technologicalcapacity,relativelabour costs,fixed capitalinvestment The Spanish industry competes incosts and technology. The role ofphysical capital investment being ofless significance. Technology ismore important in mediumtechnologycapacity sectors whilecosts are more important in lowertechnology content sectors
Barcenilla andLopez-Pueyo(2000) Analysis of the evolutionof market sharein to regions: EU andLatin America, includingthe roleplayed by macroeconomicpolicies Export andimport share Technologicalpayments,gross fixedcapital formation,population,relativeimport prices,unit labourcosts, GDPdeflator, exchangerate The only explanatory variable of theexport share is technology. There isnot a clear interpretation of theGKF.

Milberg andHouston (2005) Study the “socialgap” including technologicalview, productcycle model approachand institutionalvariables Export marketshare, importpenetration,net foreigndirect investment Demand,RULC, R;Dexpenditure,K/L ratio, netunion density,duration ofstrikes cost ofjob lost, employmentprotection,socialexpenditure R;D expending and union densityseems to be the most relevant variables.Social expending and cooperativelabour relations improve tradecompetitiveness.

Technology advancement and Economic Growth
The growth of internet value in developed countries cannot be claimed to possess been thanks to capital alone. Kindleberger discovered that major a part of this multiplied productivity is thanks to technological changes. Henry M. Robert Solow calculable that technological modification accounted for concerning 2/3 of growth of the U.S. economy; once granting growth within the labour force and capital stock. In fact, the technology may be considered primary supply in economic development and therefore the numerous technological changes contribute considerably within the development of underdeveloped countries. The impact of technological modification on production functions may be illustrated in fig.

In the on top of figures one to three R’ is Associate in Nursing isoquant of production operate before the technological modification and R’ represents a similar quantities output once the innovation within the 1st figure. The innovation is neutral with relevance labour and capital. The new production operates R shows that a similar output may be created with less labour and fewer capital once technological advancement. The second figure shows that innovation is labour saving and R’ shows that the very same output may be created with lesser inputs however the saving of labour is larger than that of capital. The third figure shows that innovation is capital saving and R’ shows that a similar output may be created by fewer inputs once the technological modification, however, the saving of capital is larger than that of labour. it’s usually assumed that technological advancement is even additional vital than capital formation. However, the capital formation alone will bring out economic development to a restricted extent and therefore the progress stops if there’s no technological modification. a rustic cannot stay obsessed on the import of technology. A nation that spends additional on science and technology analysis can tend to grow quicker than another country accumulating additional capital, however, defrayment less on technological.1228725276225

In the initial figure (4) the country A concentrates on the accumulation of additional capital resources whereas in second figure five, country B focuses attention on technological aspects, however, doesn’t regulate the buildup of capital. it’s clear that the progress of country B is quicker than that of country A because of the high rates of technological development. The thought that technological progress is additional necessary than capital formation is illustrated with the assistance of production operate within diagram 4.

In figure half-dozen, OP represents the assembly operate that rises to OP, OP2 and OP, with technological progress. On the assembly operate OP if the quantity of capital per employee raised from Rs. 150 to Rs. 200, the output per employee of labour is raised from SM to XM1, once capital per unit of labour is Rs. three hundred the output per labour is. ZM.The most objective of technological progress is to create a higher robust|an improved} utilization of labour and alternative resources and thus the assembly operate shifts upward which suggests that more output per labour is obtained by the identical quantity of capital per employee.The quantity of capital per employee remains at Rs. 150, the assembly per employee goes on increasing from SM to NM. this can be thanks to the upward shifting of the assembly operate. within the same fashion, additional production is created at alternative levels of capital intensity. Thus, technological progress ends up in shifting the assembly operate upward that allows additional output per manual labourer with the same quantity of capital per employee.

Economic growth and international trade
There has been growing theoretical proof of positive relationships between trade and growth in several developed nations, such relationships haven’t been tested through empirical observation in developing nations, significantly among African countries. Exports square measure a very important supply of financial gain associated an engine of growth, therefore an in export drive stimulates a positive multiplier factor impact on the economy with necessary feedback effects.Ajmia, Ayeb, Balcilarc and Guptad (2013) testing for the relationship between exports and economic process in African nation exploitation linear and non-linear tests, found a cointegrating relationship between the 2, and one-way relation from GDP to exports. They over that exports will improve growth in GDP through increasing employment and incomes within the export sector further as technological development. Lee and Huang (2002) cite export growth as a key thinks about promoting the economic process. Imports {are also|also square measure|are} in an elaborate way connected to economic process even supposing there are 2 competitory effects on the demand and provide facet. On the demand facet, imports square measure seen as a outflow and constrain economic process, however the import constraints square measure mitigated with trade relief in addition to potency gains on the availability facet. Mishra (2012) claims that empirical proof on the nexus between imports and economic process is very mixed and inconclusive. If inflated GDP is usually the supply of finance for imports then they will constrain growth and might have a negative impact on the economic process. a rise in imports additionally causes the import subbing domestic market to shrink, so reducing investment associated ultimately productivity arise within the capital stock on the market for an economy leads to the economy attaining a high growth path within the future through capital accumulation and increase in production capability of the economy. Anwer and Sampath (1999) using a cointegration approach, found investment to own a brief and long-haul positive relationship with GDP growth for 90 countries for the amount 1962-1992. the present analysis additionally considers investment as associate instructive variable within the analysis with alternative political economy variables. Chude associated Chude (2013) claim that government expenditure has an important role to play within the determination of the economic process for developing countries. This derives from the economic expert view wherever government expenditure is employed as an associate instrument to stimulate combination demand and thence promoteeconomic growth. However, associate unsustainably high level of presidency expenditure could exceed the commercial enterprise revenue leading to a deficit. Checherita and Rother (2010) argue that a high level of presidency deficit, and ultimately debt has negative growth effects on the economy.

It has been long studied and testified that the main determinants of trade are prices, costs of the factors and technology of a country. So it’s required to study these factors closely. As mentioned above, the economic growth and technology are interlinked with a positive relationship and also the economic growth and international trade show a positive relationship according to the theoretical knowledge, we can say that there is a existence of the positive relationship of international trade with the technology advancement. Technology plays a crucial role in the imports and exports of the country. Research and development with not so expensive production of goods can increase the exports of that country provided nominal trade barriers. So there exists a positive relationship between the two.

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