Learning Objectives Gains from Trade. Static & Dynamic Gains from Trade. Factors determining gains from trade.
6.1 Gains from Trade Gains from Trade can be traced to Ricardian Theory where it was stated that international trade leads to increase in the sum of enjoyments. In modern terms we say that International Trade is a positive sum game. These gains are measured by increase in real income of participating countries.
6.1 Static Gains from Trade These are one time gains. The trade adds to the range of products available to the participating countries. Further it allows indirect method of production. An agricultural country can produce a computer and wheat. But trade allows it to produce wheat & export it against import of computer. This indirect method is more economic [ as was proved by theory of economic advantage.]
6.1 Dynamic Gains from Trade These gains accrue over a period of time. Economies of scale : Trade opens up the markets and stops proliferation of firms with small size under protected markets. Only large size firms enjoying economies of scale are there in the market. Learning and innovation : Free trade especially with technologically advanced countries allows all participating countries to enhance their know how.
6.1 Dynamic Gains from Trade Economic Growth through following factors- Better Government Policy : With free trade, the Government is compelled to follow virtuous macro-economic policies, else there would be flight of capital or departures from international agreements. Lower price distortion: Since under trade, countries specialize according to comparative advantage; we can expect lower price distortion that has adverse effects on factor accumulation.
6.1 Dynamic Gains from Trade Trade Liberalization : Allows import of much needed capital goods to remove constraints on sound economic infra structure. Technological Transmissions : Trade allows world wide stock of productivity enhancing knowledge to be shared by all.
6.2 Factors Determining Gains from International Trade 1. Differences in Cost ratios or Relative Cost Advantage Country Comparative advantage Australia England wheat cloth Both the countries benefit from specialization and international trade. Australia imports cloth & England imports wheat.
6.2 Factors Determining Gains from International Trade 2. Reciprocal Demand or Relative Elasticities of Demand for Each Other s Commodities. Comparative cost advantage decides the upper and lower limits of prices within which countries benefit from the trade. The actual rate, however, is determined by the relative elasticities of demand for each other s commodity. Thus if England wants Australian wheat more urgently than Australian demand for its cloth, the actual terms will be in favour of Australia.
6.2 Factors Determining Gains from International Trade 3. Size of Participating Countries Small country trading with big country stands to benefit more from the trade. Its exportable surplus is small & all it can be absorbed by big country. But large surplus of a big country cannot be absorbed by a small country. Small country cannot make several products due to its size limitations; it can now import them and meet domestic requirements
6.2 Factors Determining Gains from International Trade 4. Level of Income in a Country & Gains from International Trade. The country with lower incomes stands to benefit if its products are in great demand because of high income levels in country to which it is exporting them. High income allows exporter to charge high prices, resulting in increase in wages in export industry. This results in rise in income of exporting country.
6.2 Factors Determining Gains from International Trade On the other hand, if in a country, demand for imported goods from the other country is relatively small, or elastic, the imports will be at a lower price, income of people producing these goods also will be lower. The End