Quiz 7: Growth and Trade
Disagree. According to the Rybczynski theorem, an increase in the country's labor force will result in an increase in the quantity produced of the labor-intensive good, and a decrease in the quantity produced of the other good. The additional labor goes to work in the labor-intensive industry. But, to expand production of this good, extra non-labor resources (e.g., land) are needed to work with the extra labor. These extra non-labor resources are drawn from the other industry, so production of the other good decreases.
Disagree. Immiserizing growth can occur if growth in the country leads the country to want to trade more, and the country's terms of trade deteriorate by a large amount. If a country's trade has almost no impact on world prices, then its growth will have almost no impact on its terms of trade, and immiserizing growth is very unlikely.
According to the product life cycle approach, the technological originator of a product eventually will import the product. But its overall trade need not develop into chronic "deficits." As the technological originator continues to develop new products, it will export these products, while importing older products.