Trade and Economic Growth (Revision Essay Plan)

In this video we walk through a suggested plan for a 25 mark question: "Examine the importance of trade for economic growth in a developing country of your choice."

Examine the importance of trade for economic growth in a developing country of your choice.

KAA (1) Specialising and exporting coffee generates export revenues (US$s) – which then allows Ethiopia to use foreign currency to pay for essential imports such as capital goods including heavy machinery that might be needed to increase their productive potential and therefore drive growth. Trade at a mutually beneficial terms of trade can shift out a nation’s PPF.

Evaluation (1) However in reality, Ethiopian producers may have little control over the price at which they sell their coffee. There is a risk that global prices are volatile or indeed fall over the long-run in which case their export revenues will drop, and the Ethiopian government will then have fewer resources to fund basic public services and infrastructure investment. This would have a negative effect on potential growth.

KAA (2) Successful trade often leads to rising investment in export industries. If Ethiopia opens to trade, we expect to see an increase in FDI into Ethiopia in industries such as coffee processing, emerging tech, and light manufacturing such as textiles. Higher levels of FDI might lead to more jobs in the formal economy which in turn generates more tax revenue and can raise per capita incomes which lifts people of out extreme poverty and adds to household consumption. (Trade can lead to positive multiplier and accelerator effects, rising AD and LRAS).

Eval (2) However, there might be limits to investment (e.g. since Ethiopia is landlocked) and the country may become – over time - too reliant on inward FDI, rather than developing their own manufacturers. Tax revenues to the Ethiopian government might be limited by corporate tax avoidance by TNCs. This might hold back how much the government can spend on healthcare and education.