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A Study on the Influence of Technological Progress on Terms of Trade of China

Author: YinZuo
Tutor: ZhangWeiFu
School: Nanjing University of Finance and Economics
Course: International trade
Keywords: Technological Progress Terms of Trade VEC Model
CLC: F224;F124.3
Type: Master's thesis
Year: 2011
Downloads: 58
Quote: 0
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Abstract

It is generally believed that since the reform and opening-up, remarkable technological improvement has happened in China. Meanwhile, different measurements lead to very different performances of terms of trade. As a measurement of interests a country gains in international trade, terms of trade is affected by many factors. Technology is one of them. This paper intended to find out how technological progress had functioned in the fluctuation of terms of trade, and if there was a consistent impact of technological advance on terms of trade of China and whether this impact was positive or not.At first, this paper discussed the theories of technological progress impacting terms of trade. These theories can be divided into three categories, i.e. theories based on different levels of economical development, on different methods of technological progress and on endogenous and exogenous technological progress. Of these theories, the Core and Periphery Theory has a pessimistic prediction about the long-term trend of under-developed countries’terms of trade. Meanwhile, Endogenous Technological Progress Theory considered that developing countries can narrow the technological gap between them and developed countries to achieve the improvement of terms of trade.In the empirical part, the paper examined the situation of China’s technological development taking labor productivity and total factor productivity respectively as the indicator. Then it calculated China’s commodity terms of trade and income terms of trade. It found out that, apart from individual years, there was significant technical progress in China over the past 30 years. At the same time, the commodity terms of trade showed a downward and fluctuating trend, while the income terms of trade showed a more significant increase. The paper carried out mathematical analysis and econometrical analysis to describe the relations between technological progress and terms of trade. In the econometrical analyzing part, this paper estimated the short and long term association between technological progress and the terms of trade by establishing vector error correction model. The results showed that there existed a long-term cointegration between these two varieties. In the long run, technological progress would improve terms of trade no matter which way it was measured. However, the short-term impact is uncertain. The above conclusion kept robust when using industrial products data to re- test the model.According to the empirical results, the paper recommended that our government should avoid short-sighted behavior when developing policies and should focus on the policies that can improve the quality of technological progress in the long run. As a result, the direction of policy should lead to the encouragement of the independent innovation of domestic economic agents and, in particular, export enterprises and the guidance of foreign direct investment. Then through a lasting and powerful technical progress, the transition of China’s comparative advantage in international trade can be achieved and China’s terms of trade can be fundamentally improved.

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