This reduction in cost makes the industry more efficient and allows it to compete in the world markets. The living standards of trading countries in turn improve. We have seen above that the comparative cost theory that specialisation followed by international trade makes it possible for the countries to have more of both commodities than before. It is also worth noting that when specialisation and trade occur, the quantities of the two goods consumed by a country will differ from the quantities of the two goods produced by her without specialisation and reallocation of resources. It also enlarges the scope for large-scale production. The additional investment in plant and equipment usually leads to a higher rate of economic growth. As pointed out above, besides the static gains indicated by comparative cost theory, international trade bestows very important indirect gains and benefits, which are generally described as dynamic gains, upon the participating countries. Over the last two decades, tariffs in nearly all emerging economies have dropped substantially. Economies of scale or what are called increasing returns to scale imply that as an industry expands, its unit cost of production falls. Therefore, Professor Haberler argues that since international trade raises the level of income, it also promotes economic development. 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. Disclaimer Copyright, Share Your Knowledge TOS4. 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. Specifically, what happens if the two countries trade?Producers in Country A will subsequently lose out because consumers will buy the Country B option. The principle of reciprocity implies only that the gains arising out of foreign trade are distributed fairly. Increase in the exchangeable value of possessions, means of enjoyment and wealth of each trading country. Legal restrictions and trade barriers are in place internationally to control trade, whether goods are being exported or imported. Controlling in Management # Meaning, Definition, Types, Process, Steps and Techniques. We may now briefly enlist the gains resulting from international trade: 1. International specialisation and geographical division of labour lead to optimum allocation of world resources making it possible to have the most efficient use of them. Getting paid upfront may be one of the hidden advantages of international trade. It is this trade that makes possible the division and specialisation of labour on which higher productivity of different countries is so largely based. In the limit case, when trade-ε ∗ tends to infinity or when trade-ε ∗ does not exist (as in the countries discussed in 5.1 No trade-off countries, 5.2 Trade-off countries without trade policy preference reversals), there is no reversal in trade policy preference rankings and, given gains from trade, import tariff liberalization leads to higher social welfare for any ε. The free access to Canadian firms in the US and Mexican markets under the North Atlantic Free Trade Agreement (NAFTA) permitted Canadian firms to expand and lower unit costs making their industries more efficient leading to the increase in their output. True, simple adoption of methods, developed for the conditions of the developed countries, is often not possible. By comparing the production and consumption points of the U.S.A. it will be observed that the U.S.A. will export NG amount of wheat and import NH amount of cloth. It will also be seen from Fig. Over time, companies gain a competitive advantage in global trade. Let’s suppose there are two countries – Country A and Country B. 5. DEFINITION Gains from International trade refers to that advantages which different countries participating in international trade enjoy as a result of specialization and division of labour. 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. The most-favoured-nation clause The most-favoured-nation (MFN) clause binds a country to apply to its partner country any lower rate of import duties that it may later grant to imports from some other country. PreserveArticles.com is a free service that lets you to preserve your original articles for eternity. Cheaper imports. I Supporting trade policy-making with applied analysis Quantitative and detailed trade policy information and analysis are more necessary now than they have ever been. As pointed out above, the importance of and gain from international trade follows from the theory of comparative cost. Since that time, initiatives at the WTO as well as regional cooperation have slowed to a crawl. This caused increase in production of goods not only for the domestic economy but also for exporting them to other countries. 36.1, while India will export MR quantity of cloth, she will import MS quantity of wheat. It is evident from the production possibility curve CD that the factor endowments of the U.S.A. are more favourable for the production of wheat. The growth of technical know-how, skill and managerial ability is an important requisite for economic development of developing countries. In other words, the loss attributed to the immobility of factors is overcome by the product movements between the trading countries. Trade as a share of world output grew from the mid-teens in 1989 to 28 percent by 2007, and the income gains from trade made market-opening initiatives reasonably popular. For industries subject to increasing returns to scale, free trade may allow an industry in a small country an opportunity to expand its production and lower its unit cost. The distribution of the gains from trade depends on what different groups of people consume, and which types of jobs they have, or could have. In most countries, such trade represents a significant share of gross domestic product (GDP). Furthermore, even more important than the importation of capital goods is the transmission of technical know-how, skills, managerial talents, entrepreneurship through foreign trade. Hence, the world at large becomes a happy world. It will be seen from Fig. However, in addition to static gains there are dynamic gains from trade. Empirical evidence shows that such gains are quite small, less than one per cent of GDP of the trading countries. TOS 36.1 that at point R, India will produce more of cloth in which it has comparative advantage and less of wheat than at F. 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