Differences in production possibilities and costs of production of various products between different countries of the world are so great that tremendous gain in terms of additional output and income accrues to the world community from international specialisation and trade. However, in addition to static gains there are dynamic gains from trade. Their production possibility and indifference curves for cloth and wheat are shown in Figs. It is worth mentioning here that the pattern of import trade of the developing countries has changed in the last several years and now consists of greater quantity of various forms of capital goods and less of textiles. On the other hand, dynamic gains refer to the contributions which foreign trade makes to the overall economic growth of the trading countries. In Fig. He thus remarks – “What is good for the national income and the standard of living is, at least potentially, also good for economic development; for the greater the volume of output the greater can be the rate of growth—provided the people individually or collectively have the urge to save and to invest and economically to develop. Specialisation by different countries according to their production efficiency and factor endowments ensures optimum use and allocation of resources of the countries. Privacy Policy3. PreserveArticles.com: Preserving Your Articles for Eternity, Short Essay on the Classical Theory of International Trade. a. As Ohlin states, the disadvantage of disproportionate geographical distribution of productive resources are mitigated by international trade. Thus according to Professor Haberler, “International division of labour and international trade, which enable every country to specialise and to export those things which it can produce cheaper in exchange for what others can provide at a lower cost, have been and still are one of the basic factors promoting economic well-being and increasing national income of every participating country.”. The economies of scale so realised would reduce the cost of production, consequently goods may cheaply be available to domestic consumers than otherwise. It is this trade that makes possible the division and specialisation of labour on which higher productivity of different countries is so largely based. If the various countries could not exchange the products of their specialised labour, each of them would have to be self-sufficient (i.e., each of them would have to produce all goods it requires, even those which it could not produce efficiently) with the result that their productivity and standard of living will go down. The desire to get economic gains from trade leads to cooperative international agreements; c. Heightened economic competition activates economic and political backlash that tries to limit market pressures and reassert control over economic outcomes Even Maruti Company which enjoyed a high degree of monopoly power in the Indian car industry had to improve its quality and fix prices of its models at reasonable levels. These dynamic gains from trade refer to the gains from trade that accrue to the countries over time because trade induces economic growth of a country and brings increase in efficiency in the use of resources by a country. There are three types of international trade: Export Trade, Import Trade and Entrepot Trade. 2. Trade is not without its problems. 36.1 and 36.2. Empirical evidence shows that such gains are quite small, less than one per cent of GDP of the trading countries. True, simple adoption of methods, developed for the conditions of the developed countries, is often not possible. The Gains from trade are the benefits from trading rather than producing i.e. Specialisation by different countries in the production of different goods according to their comparative efficiency and resource endowments brings about an increase in the total world production by increasing the level of their productivity. This reduction in cost makes the industry more efficient and allows it to compete in the world markets. Under international trade each country will get more of each variety of goods, more varieties and qualities of goods to consume. terms of trade (also called “trading price”) the price of one good in terms of the other that two countries agree to trade at; beneficial terms of trade allows a country to import a good at a lower opportunity cost than the cost for them to produce the good domestically, thus the country gains from trade. International trade results in an increase in efficiency and total welfare among consumers and producer in the countries that participate in it. 3. However, these gains from specialisation and trade made possible by reallocation of the given resources along a given production possibility curve are one-time event and are therefore called static gains from trade. 3. Entrepot Trade is a combination of export and import trade and is also known as Re-export. This is a further source of gain from international trade which makes goods cheaply available. There has been rapid technological progress in the developed countries. The gains in openness of the last few decades proved to be exceptionally robust in the face of the shock of the Great Recession. The higher the level of output, the easier it is to escape the ‘vicious circle of poverty’ and to ‘take off into self-sustained growth’ to use the jargon of modern development theory. It is thus clear that developing countries derive tremendous gains from technological progress in the developed countries through the imports of capital goods such as machinery, transport equipment, vehicles, power generation equipment, road building machinery, medicines, and chemicals. Papers, essays, articles and other allied information submitted by visitors like you U.S.A. Of reciprocity implies only that the gains arising out of foreign trade are distributed fairly factor endowments is. 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