Immiserizing growth is the special case in which economic growth actually makes a country worse off than before. If the country is big enough to influence world prices and if demand for the good is inelastic enough higher productivity can actually make a country worse off. Our expanded theory of comparative advantage is designed to highlight this problem. What is the nature of this problem and what assumptions lead to it in the model?
I think on this question, Google is your friend.
Start here:
http://en.wikipedia.org/wiki/Immiserizing_growth
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The concept of immiserizing growth refers to a situation where economic growth leads to a country becoming worse off instead of better off. In this scenario, even though the country is experiencing an increase in its level of income or production, the negative impact on its overall welfare outweighs any positive effects.
To understand this problem and the assumptions that contribute to it in the model, let's break it down:
1. Big enough to influence world prices: This assumption implies that the country has a significant market share and the ability to affect global prices of its exported or imported goods. By increasing productivity and output, the country could potentially impact the supply and demand dynamics in the international market.
2. Inelastic demand for the good: This assumption signifies that the demand for the country's goods is relatively insensitive to changes in price. In other words, even if the country lowers its prices due to increased productivity, the increase in demand might not be substantial enough to offset the decline in prices.
The nature of the problem arises from the interaction of these assumptions. When a country experiences immiserizing growth, the following sequence of events occurs:
1. Economic growth leads to increased productivity and increased production of the exportable good.
2. The country lowers its export prices due to increased output, aiming to capture a larger share of the international market.
3. However, if the demand for the country's goods is inelastic, the decrease in prices may not result in a proportional increase in demand.
4. As a result, the decline in export prices exceeds the reduction in production costs, causing a decline in the country's terms of trade (the ratio of export prices to import prices).
5. The deteriorating terms of trade lead to a decrease in the country's overall welfare, which can potentially make it worse off.
It's important to note that immiserizing growth is a theoretical concept and may not always hold true in real-world scenarios. It depends on the specific circumstances, including the size of the country, the elasticity of demand, and the nature of its trade relationships. Nonetheless, the expanded theory of comparative advantage allows us to analyze and understand the potential implications when such conditions arise.