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Chapter 7 Growth and Trade Objectives of the Chapter In this chapter, the HeckscherOhlin model of international trade is extended to include growth in the endowment of a country’s factors of production and technological improvements. The impact of economic growth on international trade will depend on whether the growth is balanced in all goods or is biased toward one good, and on whether the country experiencing growth is large or small. An interesting result emerges from the interaction of growth and international trade: growth in one’s own country may not be an unmitigated blessing. First, as the Rybczynski theorem shows, growth in one sector can cause production in non-growing sectors to decline. Second, under certain conditions, export-biased growth may lead to an adverse terms of trade effect, and national well-being may actually decline. After reading Chapter 7 you should be able to show how trade patterns are influenced by the source of economic growth. show how economic growth can change the production patterns of a country. discuss how growth affects the terms of trade and the well-being of the country experiencing it. relate the rate of growth in a country to its openness to international trade. Important Concepts Dutch disease: A famous example of the phenomenon described by the Rybczynski theorem. The term was used to describe a problem experienced by the Netherlands, in which the discovery of new natural gas fields was thought to have led to a decline in the production of manufactured goods. Immiserizing growth: In a large trading country which is heavily dependent on trade, growth in the export sector may lead to a deterioration in its terms of trade large enough to reduce the country’s welfare. Product cycle hypothesis: Predicts that as the technology of a product becomes more standardized and static, production shifts from high-skilled labor countries to countries abundant in low-cost, low-skilled labor. Rybczynski theorem: In a two-product worl