What are the Gains of International Trade?



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.

2. Increase in the exchangeable value of possessions, means of enjoyment and wealth of each trading country.

3. As Ohlin states, the disadvantage of disproportionate geographical distribution of productive resources are mitigated by international trade. In other words, the loss attributed to the immobility of factors is overcome by the product movements between the trading countries.

4. Foreign trade for a country widens the size of market and thereby, helps in reducing the risks involved in huge investments undertaken for the growth of home industries. It also enlarges the scope for large-scale production. The economies of scale so realised would reduce the cost of production, consequently goods may cheaply be available to domestic consumers than otherwise.

5. Under international trade each country will get more of each variety of goods, more varieties and qualities of goods to consume.

6. International trade causes enlargement of world's total output.

7. International trade thus, leads to an increase in the world's prosperity and welfare of each trading nation. The living standards of trading countries in turn improve. Hence, the world at large becomes a happy world.

Sources of Gain:

According to the classical theory, specialisation based on the principle of comparative costs advantage is the major source of gain from international trade. An additional source is the possibility of exploiting economies of scale when the size of the market is extended through the free foreign trade of a country.

Adam Smith's dictum is "Division of Labour is limited by the size of markets." Obviously, when the size of the market expands as a result of international trade, the scope for large scale production and thus for complex division of labour and specialisation, increases. Under economics of large scale, when specialisation occurs, the output per unit of input may rise so that, costs per units of output fall. This is a further source of gain from international trade which makes goods cheaply available.

The theory implies that comparative costs are different in different countries because the abundance of factors which are necessary for the production of each commodity does not bear the same relation to the demand for each commodity in different countries.

Thus, specialisation based on comparative costs advantage clearly represents a gain to the trading countries in so far as it enables more of each variety of goods to be produced cheaply by utilising the abundant factors fully in the country concerned and to obtain relatively cheaper goods through mutual international exchange.

Further, the principle of comparative cost-difference of gains in international trade should not be looked upon merely as a possibility theorem, but as a positive hypothesis relating to the real world.

The doctrine of comparative costs predicts that in the real world, there will be gains from trade in terms of increased world production. As such, each trading country will gain by getting relatively more and cheaper goods and no one will lose by having less to consume than it would have if it were self-sufficient.

Though, the validity of the theory of comparative costs has not been conclusively proved, its general hypothesis that production and consumption in the real world and in each country would be higher under international trade than what it would be without it if all countries were forced to be completely self-sufficient, cannot, for obvious reasons, be rejected even by any empirical tests.