Gains from international trade, Managerial Economics

Gains From International Trade

The gains from International trade are to make the participating countries better of than they would have otherwise been.   This will be the result of a number of advantages which a country can derive from international trade, namely:

The vent-for-"surplus" product

Many countries have products which are surplus to their own requirements and it is only by exporting these that they have value at all.  Thus, the plantations of coffee in Kenya are only of value because of the existence of international trade.  Without it, the coffee would mainly be unused and remain unpicked.

Many of the primary products that are exported would be of no use to the country.   Without trade, the land and the labour used for their production would be idle.  Trade therefore gives the country the opportunity to sell these products and to make use of the available land and labour.

Importation of what cannot be produced

A country has to import what it cannot produce.  Certain countries like Japan and Britain could not manufacture goods without the importation of most of the raw materials.  There is thus necessity for international trade in respect of these essential materials.

Specialization according to absolute advantage

International trade allows a country to specialize in the production of commodities where it more efficient than other countries.  For instance, if we take a situation in which each country in a simple two country model has an absolute advantage in producing either fruits or beef but is able to produce the other commodity only if required (for simplicity we assume constant returns to scale and full utilization of resources).  Suppose that each country has equal resources and devotes half its limited resources to citrus fruit and half to beef and the production totals are:

                                    Units of Citrus fruits                Units of Beef

Country X                                10                                      5

Country Y                                5                                        10

World total                                    15                                                15

The relative or comparative costs of citrus production is lower in country X than in country Y, but the situation is reserved in the case of beef production.  Country X has an absolute advantage in citrus fruit production and Y has an absolute advantage in beef production.  If each country specializes in the production of the commodity in which it is most efficient and possesses absolute advantage, we get:

Units of Citrus fruits                Units of Beef

Country X                      20                                  0

Country Y                      0                                    20

World total                       20                                           20

The gains from trade are obvious with five units m ore of fruit and five more of beef - provided we assume that transport costs are not so enormous as to rule out gains made.

Specialization according to comparative advantage

Even if one country can produce the two goods more efficiently at a lower comparative cost than the other country, there could be gains to be made from International Trade.  This possibility is explained by the theory of comparative advantage.  Suppose that country X is more efficient in both citrus fruit and beef production.  If each country devoted half its resources to each, let us imagine the production totals are:

Units of Citrus fruits                       Units of Beef

Country X                                30          60          

Country Y                                20          10

World total                                    50            70

Country X possesses an absolute advantage in both industries but whereas X is only 50% more efficient in the citrus fruit production, it is six times more efficient in beef production.  Even so, if country Y produces an extra unit of citrus fruit it need give up only half a unit of beef.  In contrast, country X must give up two units of beef to increase production of citrus fruits by one unit.   It is evident from this example that although a country may have absolute advantage in the production of all products, it is possible for a country such as Y to produce some products relatively cheaply at lower opportunity cost than its trading partner X.  When this occurs as in the simple example above then economists describe X as possessing a comparative advantage in the production of citrus fruit.

If each country specializes completely in the activity in which it possesses a comparative advantage, the production totals are:

Units of Citrus fruits                       Units of Beef

Country X                                  0          120         

Country Y                                  40          0

World  total                                      40         120

What is evident from these last calculations is that although the overall production of beef has increased, the output of citrus fruit has fallen by ten units.  Thus we cannot be sure without some knowledge of demand and the value placed on the consumption of citrus fruit and beef that a welfare system gain will result from specialization.

Competition

Trade stimulates competition.  If foreign goods are coming into a country, this puts home producers on their toes and will force them to become more efficient.

Introduction of new ideas

International trade can introduce new ideas into a participating country; it can stimulate entrepreneurship and generate social change.  This is especially the case in developing countries where the development of expert industries can lead to the emergence of a commercial class desirous of change and opposed to any practice that hold back economic advancement.

Technological advances can also be introduced into a country as companies start to base their production in overseas countries.

Widening of choice to the consumer

It is undoubtedly a great benefit to be able to buy a wide range of goods that would not otherwise be available.  International trade offers to the consumer a wider choice.  This greater availability of goods may indeed prove to be of economic advantage.  For in a country, producers may only be prepared to take risks and invest their time and money in a business if they can spend the resultant income on consumer goods.  These may be imported, especially if the country lacks consumer goods industries - as in may developing countries.  Thus, these imports of consumer goods provide the incentive for productive effort within the country.

Creation and maintenance of employment

Once a pattern of international trade has developed, and countries specialize in the production of certain goods for export, it follows not only has that trade created employment in those sectors, but that the maintenance of that trade is necessary to preserve that employment.  In the modern world with its high degree of interdependence, a vast number of jobs depend upon international trade.

Restrictions on International Trade

Despite the arguments of the "classical" theory of free trade, the twentieth century has seen the gradual movement away from free trade, with governments increasingly imposing restrictions on trade and capital flows.  All have adopted, to varying extents, various forms of restrictions to protect some of their industries or agriculture.

Posted Date: 11/30/2012 4:55:42 AM | Location : United States







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