An important implication of the effect of improvement on the terms of trade is that a developing economy experiences unfavourable terms of trade as a result of technological advancement.
In the words of Mill: “The richest country, ceteris paribus, gain the least by a given amount of foreign commerce: since, having a greater demand for commodities generally, they are likely to have a greater demand for foreign commodities, and thus modify the terms of interchange to their disadvantage.”
Edge worth termed this phenomenon as ‘Mill’s Paradox’ and Bhagwati called it ‘immiserizing growth’. The explanation of this statement is that as consequence of an increase in productivity, the supply of export goods increases and the developing country is faced with a problem of finding foreign markets for it.
The situation is serious in those developing economies where the technological improvement is confined to the export industry only and foreign demand is inelastic.