Write a short note on Sources of gain from international trade.
Sources of gain from international trade : Gains from trade are commonly described as resulting from:
- A resulting increase in total output possibilities.
- Specialization in production from division of labor, economies of scale, scope and agglomeration and relative availability of factor resources sources are:
- Differences in cost ratio : The gains from international trade depends upon the cost ratios of differences in comparative cost ratios in the two trading countries. If the difference between exchange rate and the cost of production is lesser than lesser will be the gains from trade and vice versa.
- Factor availability: International trade is based on the specialization and a country specializes depending upon the availability of factors of production. It will increase the domestic cost ratios and so the gains from trade.
- Demand and supply : If a country has elastic demand and supply it gives more gains from trade vice versa with inelastic demand and supply.
- Terms of trade : If the cost ratio and terms of trade are closer to each other more will be the gains from trade of the participating countries.
- Size of the country and its productive efficiency.
These main sources are :
- Differences between regions of the world in climate and resource endowment that lead to advantages in producing certain goods and disadvantages in producing others. These gains would occur even if each country’s cost of production. Where unchanged by the existence of trade.
- Reduction is each country’s cost of production resulting from the greater production that specialization brings.
- International competition which usually promotes more rapid technological change and economic growth than would occur if domestic firms produced solely for a protected home market.