Under certain circumstances, economic growth that increases an economy's capacity to export can trigger a worsening terms of trade that completely eliminates the welfare gains from the increased output and trade. This is called:
A) the Porter-Linder hypothesis.
B) the combinatoric growth hypothesis.
C) the Heckscher-Ohlin hypothesis.
D) the immizerizing growth hypothesis.

Question

Quizplus · Accepted Answer

The immizerizing growth hypothesis suggests that under certain conditions, economic growth may result in a decline in a country's terms of trade to the extent that the welfare gains from the increased output and trade are completely eliminated. This occurs when the increased production leads to a surplus supply of goods, causing their prices to fall on the world market, and thus reducing the relative prices of the country's exports. As a result, the country may end up worse off than before, despite achieving higher levels of economic growth and export capacity.

Under Certain Circumstances, Economic Growth That Increases an Economy's Capacity