International Trade and Economic Growth †MyAssignmenthelp.com

Question: Discuss about the International Trade and Economic Growth. Answer: Introduction: One of the most robust theories in the international trade is the theory of Comparative Advantage, as has been proposed by David Ricardo. According to the comparative advantage theory of trade, all other things remaining the same, a country specializes in the production of that commodities or services and also exports those in which the country enjoys a comparative advantage in production, over the other countries with which it is trading. On the other hand, a country imports those goods and services, in the production of which it has less comparative advantage or more disadvantage (Laursen, 2015). The only factor of production is labor. There is free trade in the economy. There are constant returns to scale in the economy. There is perfect mobility of labor in the domestic territory but labor is immobile internationally (Gopinath, Helpman Rogoff, 2014). The Absolute Advantage theory asserts that the countries will produce and export those commodities and services in the production of which they have an absolute advantage. However, there may arise several situations in which, between the two trading nations, in which a country may experience absolute advantage in the production of all the commodities in which these two countries are trading. In this situation, the Absolute Advantage Theory cannot explain how the trade will take place between these two countries. In this situation, the Comparative Advantage Theory is more applicable than the Absolute Advantage Theory. Countries 1 Unit of Wine 1 Unit of Cloth England 120 100 Portugal 80 90 As can be seen from the above table (the numbers showing the number of labor required to produce one unit of the commodity. According to Absolute Advantage Theory, Portugal should produce both wine and cloth. However, this does not facilitate trade between the two countries. However, from the perspective of Comparative Advantage Theory, Portugal has comparative advantage in the production of wine than in cloth, while England comparatively produces cloth more efficiently than they can produce wine. Therefore, as per the theory, Portugal should produce wine and England should produce cloth and trade with each other (Feenstra, 2015). Comparative Advantage and Gains from Trade The term Gains from Trade, in economics, refers to the benefits of the trading agents, which accrues to them when they are allowed to trade voluntarily with each other. The gains from trade lead to an increase in the consumer and producer surplus in the economy of a country. The gains from trade occurs in a country, when there are several sectors in the country in which it experiences specialization and cost effectiveness, which in turn, helps the country to export those goods and services, which increases the trade surplus of the country and the country gains from trade. This concept of specialization is related to the theory of Comparative Advantage, which asserts that the country exports those commodities in which it enjoys comparative advantage over the other countries, which indirectly reflects towards the idea of specialization in the production of goods and services. Thus, the theories of Comparative Advantage and gains from trade are related in terms of specialization (Deardorff, 2014). Economies of Scale The economies of scale, in economies, are defined as the decrease in the average cost of production, which a firm experiences with increase in the cost effectiveness and in the quantity of production of the concerned commodity. Economies of scale can be both internal as well as external. Internal economies of scale occurs in a firm, when the concerned firm itself enjoys reduction in the cost of production, due to several advantages in production, which is subjected to the concerned firm itself and not is not applicable for the industry itself. On the other hand, a firm experiences external economies of scale, when the cost of production of the entire industry falls and like any other firm in the industry, the concerned firm also benefits from the economies of scale which is accrued to the entire industry (Polkinghorn, 2016). The concept of economies of scale has implications on the international trade scenario. When both the countries involved in a trade relation are intensive in the same factor of production, then the country, whose industry experiences economies of scale in the production of a commodity, will produce the same commodity more efficiently and cost effectively than the other and thus will enjoy more gains from trade. The other country, in this situation, has to specialize in some other commodity or has to work towards achieving economies of scale to stay in the international competitive trading scenario (Johnson, 2013). References Deardorff, A. V. (2014).Terms of trade: glossary of international economics. World Scientific. Feenstra, R. C. (2015).Advanced international trade: theory and evidence. Princeton university press. Gopinath, G., Helpman, E., Rogoff, K. (Eds.). (2014).Handbook of international economics(Vol. 4). Elsevier. Johnson, H. G. (2013).International trade and economic growth (collected works of Harry Johnson): Studies in pure theory. Routledge. Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization.Eurasian Business Review,5(1), 99-115. https://www.researchgate.net/profile/Keld_Laursen/publication/289126100_Revealed_Comparative_Advantage_and_the_Alternatives_as_Measures_of_International_Specialisation/links/5689525e08ae1e63f1f8e2f3/Revealed-Comparative-Advantage-and-the-Alternatives-as-Measures-of-International-Specialisation.pdf Polkinghorn, A. (2016). Economies of scale.Br J Gen Pract,66(648), 351-351. https://www.researchgate.net/profile/Carole_Beighton/publication/304664258_Learning_disability_registers_in_primary_care/links/577cf2d808ae355e74f2e573.pdf