Dependency Theory

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Dependency Theory explains the negative impact trade can have on countries that become locked into an unproductive pattern of exporting primary goods and importing finished goods. Such a pattern of production prevents timely industrialization and is likely to trap a country in a low rate of development. This trap occurs because of external commodities of scale. Trade policy generally helps to develop industry, however in the case of dependency, the terms of trade have turned against poorer countries to a point where they can no longer accrue capital to advance themselves. In these types of trade, productivity increases are focused on the traded good sector of the rich country. Because developing countries devote so many resources to exporting raw materials to large countries, they may never get to produce goods in which they have a comparative advantage. A tariff may allow an industry that capitalizes on a large labor force to grow, but can also be disastrous in the anti-export bias the tariff creates.