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Financial Development and International Tradecomparative Advantage

Author: XuTao
Tutor: ZhaoYingJun
School: Zhejiang Technology and Business University
Course: International trade
Keywords: financial development comparative advantage panel cointegration model economies of scale factors of production
CLC: F752;F224
Type: Master's thesis
Year: 2010
Downloads: 64
Quote: 0
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Abstract

The traditional theory of financial development is focused on the relationship between financial development and economic growth. Financial development can mobilize and optimally allocate scarce resources, thereby promoting economic growth; on the other hand, many economists believe that international trade is the "engine" of economic growth. Many studies show that comparative advantage is still the main driving force of international trade, but there are still many controversies about the sources of comparative advantage of trade. In China, how to interpret the phenomenon that the different regions with similar economic conditions exists a huge difference in the export trade is of theoretical and practical significance. Since the late 1990s, as the theory of financial development and international trade integrate increasingly, the research on the relationship between the two topic becomes a rapidly growing academic frontier. Through the research of the relationship between financial development and comparative advantage of trade, we can make out a different interpretation to the current trade situation, and it thus has practical significance. The financial crisis, which erupted in 2008, also raises the awareness of the importance of the relationship between financial development and comparative advantage of trade. With the reality of China, this paper intends to do research on the relationship between financial development and comparative advantage of tradeWith theoretical prove and empirical test, this paper applies two points of view to demonstrate the subject. In this paper, the first part reviews the theory literature of financial development and trade theory. In the second part, through the combination of Rybczynski Theorem and Edgeworth Box, we illustrate that the raise of the level of financial development will lead to unbalanced growth of production factors, which can cause accumulation of capital and changes in trade structure, and ultimately affect the comparative advantage of trade. By reference of the economic model of consumers, producers and financial intermediation, in a closed economy and open economy, we discuss in both cases and get the conclusion that the raise of the level of financial development will lead to economies of scale in industrial products manufacturers and thus influence trade comparative advantage. Through the discussion of entrepreneurs’optimization problem, we come to another conclusion that financial development affects comparative advantage of trade more obviously in the relatively backward region. In the third part, from 1990 to 2008, we use 19 years of economic data on China’s 26 provinces, autonomous regions and municipalities, make an empirical test to the relationship between comparative advantage of export trade and the level of financial development. By using cross-sectional data, panel cointegration model and panel error correction model, we come to the conclusion that the level of financial development of China’s provinces and municipalities affect the comparative advantage of international trade relatively obviously. The article points out that there exists a Long-run equilibrium between the financial development level of China’s area and comparative advantage of trade, which provides a theoretical basis for our country’s financial development strategy. Meanwhile, we also point out that the static capital-dependency of comparative advantage of exports does be weak in most developed provinces, while in relatively backward provinces it is relatively strong. The reason why Shandong Province’s export trade was weaker than that of Zhejiang Province is its correlation between comparative advantage and development of financial intermediation is weak compared with Zhejiang Province. In short term, the comparative advantage of trade of eastern coastal areas is relatively sensitive with financial efficiency, and that of the inland areas is more sensitive with the expansion of financial intermediation. Through the conclusion of this paper, we also provide a relatively new interpretation on China’s current trade situation. Not only do we provide a favorable theoretical support for our long-term and short-term strategy of financial development, but also make a relatively new attempt on trade theory.

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