6.3.3. Gains from International Trade

6.3.3. Gains from international trade

International trade provides many benefits which are called gains from international trade. Several benefits accrue to a country when it trades with foreign countries. Its national income, level of output and growth rate of economy register an increase which would eventually lead to poverty alleviation and economic development. Foreign trade widens market for various goods and services and therefore encourages investment in production, increased income and concomitant savings. Employment opportunities are generated rapidly. When the export of farm products are beneficial to a country, and when it undertakes the export, the farmers are also benefited. They could produce more to cash in on widened marketing prospects. Their standard of living would also improve.

Foreign trade makes available foreign know-hows, facilitates capital flow to the exporting country and encourages efficiency and excellence in production. Also, several indirect benefits accrue in international trade.

The other important gains are given below:

(a) Expansion of market

International trade facilities exchange of marketable surplus with countries where demand exists. It may also be more profitable to export when the price offered in the international market is higher than that of domestic market. Frozen shrimps, for example, are fully exported from country as it fetches a high price in overseas markets.

(b) High level of consumption

When an economy is involved in international trade it is called an open economy and when it does not trade with other countries it is known as a closed economy. The absence of international trade is called autarky.

When international trade for a good exists, then, production of that commodity is high as it will be more than the demand in the domestic market. High demand with enough purchase power and willingness to buy leads to a high level of consumption across the world.

(c) High economic growth

International trade provides many gains and acts an engine of economic growth. When a country is immensely benefitted from international trade, its economic growth becomes rapid. In the early period foreign aid was considered essential to develop an under-developed economy. Now, international trade is considered as a potential source of economic growth which is the primary objective of developed countries.

Foreign enables economic development by making available the following factors:

i) capital through international investment,

ii) means of development in the form of raw materials, goods and machinery and

iii) technical know-how

Apart from these important factors for economic development, exports constitute the key factor in deciding the sustained rate of economic growth. Countries have to create export surplus by specialising factor endowments and producing on a large scale with minimum cost.

Further, export industries stimulate home industries and increase their productivity. Thus, international trade causes high economic growth and development.

(d) Factor prices equilibrium

In domestic trade the factor prices vary but international trade helps to optimise production since there is no restriction on marketing through efficient resource use. When modern technology is adopted, output is more and unless it is consumed, optimal production may not be possible. In international trade, it is possible to use the resources efficiently and in such cases production may take place where it is cheap to produce from where it may be marketed worldwide.

However, there are criticisms against export and foreign trade as well. In the case of foreign trade between a developed country and a less developed country, it is argued that the former stands to be benefitted more at the cost of the latter. Technological and financial strength of the developed countries due to exports is questionable and there has been a secular deterioration of the terms of trade of the less developed countries. Despite these criticisms foreign trade is widely considered as an engine of economic growth.

Last modified: Tuesday, 22 November 2011, 6:36 AM