The role of trade in economic development, International Economics Assignment Help

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The role of trade in economic development

It is generally acknowledged that foreign trade plays a significant role in economic development of a country. The development gains of foreign trade are of two types: (i) static or direct gains, i.e., the gains that arise once for all time and (ii) dynamic or indirect gains, i.e., the gains that arise from the backward and forward linkages of the export sector and their influence on the other aspects of the economy. While classical and neo-classical analysis was confined to the static gains of foreign trade, the modem economists pointed out also the dynamic gains of trade. In this section, we will discuss the static and dynamic gains and their contribution to economic development.

The Classical and Neo-Classical View: Trade as Engine of Growth

The classical and neo-classical economists held the view that foreign trade can work as a propelling force in economic development of a country. This view is clearly reflected in Adam Smith's view that foreign trade provides 'vent for surplus'. The 'vent for surplus' model assumes that, without trade, the resources of country remain underutilized and the country produces inside its production frontiers. Adam Smith's model of foreign trade postulates that foreign trade creates opportunity for utilization of idle labour force and uncultivated land. The utilization of idle resources increases the level of production. Given the domestic demand, "utilization of idle resources generates surplus and foreign trade provides market for surplus production. This increases the levels of income, consumption and welfare. Ricardo goes one step further. His trade theory of comparative advantage tells that trade accelerates the pace of economic growth not only through the utilization of idle resources but also through a better and more efficient allocation of resources. A more efficient use of resources increases production from the given amount of available resource.            


Although classical and neo-classical economists had confined to the analysis of static gains of foreign trade, John Stuart Mill highlighted such dynamic or indirect gains of foreign trade to economic development as increased use of machinery, improvement in the technique of production, and 'inventions and improvements in the process of production', acquiring new tastes and skills. According to Haberler', trade yields five kinds of dynamic benefits to economic development:

(i)      by expanding the size of the market, trade creates opportunity for fuller utilization of idle and underutilized resources and helps pushing production level to the production frontiers;

(ii)     trade increases the size of the market which helps increasing the scale of production. Increase in scale of production yields economies of scale;

(iii)    trade increases the flow of capital from the developed to the under-

International Trade and Economic Development 193 developed countries, increases supply of capital and overall production capacity; (iv) trade serves as a vehicle of technology transfer, dissemination of new" ideas and technical know-how and managerial skills; and,

(v)     Trade serves as a powerful weapon for monopoly and thus yields gains of international competition.

Meade has classified the "indirect benefits of trade on development' as follows: "(1) those that widen the extent of the market, induce innovations and increase productivity, (2) those that increase savings and capital accumulation, and (3) those that have an educative effect in new wants and tastes and in transferring technology, skills and entrepreneurship.'? It was, perhaps, for such gains of trade that D.H. Robertson (1940) called trade as "an engine of growth." 

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