Impact of International Trade on Economic Growth

The aim of the article is to explain how international trade impacts the level of economic growth in both the short and long term. At first the analysis deals with several versions of the Factor Endowment Theory and the reasons for its poor empirical evidence are theoretically explained. The Integrated Equilibrium technique is used to account for all the supply-side motives to trade, which is possible thanks to D.R. Davis’ theory of intra-industry trade. This analysis shows that trade generated by endowment differentials will never find its clear representation in aggregated macroeconomic statistical figures, because it is submerged in a larger entity of trade motivated by the need for differentiation. Only when there is no trade at all or it is insufficient the endowments theory can be useful to create some new streams of trade. These facts are already present in the established theory, but some new technical solutions and irrefutable explanations are contributed by this analysis. In light of the above-mentioned limitations, an initial model of P.R. Krugman, inspired by the well-known formula of A.K. Dixit and J. Stiglitz for diversity-motivated trade, is developed. The model is generalized by extending its basics beyond the unique factor (i.e. labor) used by P.R. Krugman in order to cover all the factors and save some of the logic of the endowments theory. However, the need to use a Cobb-Douglas type function has been confirmed in the process. P.R. Krugman’s attempt to consider all goods as perfectly symmetric against the utility function has been proven as definitely feasible and a precondition to express the utility function désormais in monetary units. This, in turn, allowed the author to deliver his main contribution by setting a formal model explaining how international trade (and, for obvious reasons, also inter-regional trade in the case of large countries) impacts the level of economic growth. To outline the limitations of the proposed model, the long-term impacts of trade have been presented based on P.R. Krugman’s New Economic Geography theory, combined with the author’s own findings about non-labor dependent industries belonging to the so-called second sector. The main conclusion is that, at a given moment of economic history, the growth of an economy is strictly related to its international and inter-regional trade, and this can be used to combat downturns. At the same time, a process of differentiation sets in in the level of economic development in the longer term between countries and regions. However, this process is decreasing thanks to the development and modernization of the second sector.