What are the Criteria of Measuring Gains from International Trade?

Gains accrue to all the participating countries in international trade. As noted by Jacob Viner, the classical economists usually adopted the following alternative criteria of measuring the gain from trade accruing to an individual country:

1. Reduction in the Cost of Production.

2. Enhancement of the Real Income.

3. The nature of Terms of Trade.

In the first criterion of cost reduction, the classists refer to the notion that, when international trade develops, a country tends to specialise in the production of those goods in which it has a high comparative cost advantage or the least disadvantage. Evidently, as the specialisation brings economy in the operational costs, the output is produced at reduced costs.

The gain from trade may therefore, be visualised as an equivalence of the magnitude of cost economy. Again, specialisation also leads to an improved efficiency and productivity in country’s labour. Hence, the gain can also be measured in terms of the degree of improvement in the country’s productivity. Especially, when the general marginal product of country’s export sector is increased on account of trade, it is referred to as gain.

In short, an index of cost reduction or improvement in the marginal physical product of labour can be used as a criterion for measuring the gain from international trade.

Thus, the gain from trade may be measured as under: G = Ca – Cb

Where,

G stands for the gain;

Ca stands for per unit cost of production after trade;

Cb stands for per unit cost of production before trade.

If G is negative, it suggests cost economy to that extent.

Similary, the other method may be given as under:

G = MP Pa – MPPb

Where,

MP Pa refers to the marginal physical product of labour after trade.

MPPb refers to the marginal physical product of labour before trade.

The positive magnitude of Gi thus, implies a gain to that extent.

A second criterion, the real income criterion follows from the first that to the extent the real income or the net national product of the country increases on account of international trade, may be regarded as the gain from international trade. Thus:

G = Ya-Yb

Where,

Ya stands for the national income after trade.

Yb stands for the national income before trade.

The last criterion, the terms of trade index, of measuring gain is, however, the most celebrated one. Terms of trade refer to the ratio of export price (Px) to import price (Pm) of a country –

The terms of trade in nature may be favourable or unfavourable to a country. If

The terms of trade are favourable to the country concerned. If, however,

Terms of trade are said to be unfavourable. To the extent, terms of trade are favourable to a country it reaps a larger share of total gain in the foreign trade. The larger share of gain accrues to a country having favourable terms of trade, as it gets relatively more amount of importables against a given quantity of its exportables.

Evidently, a country with unfavourable terms of trade would fetch a smaller gain. The terms of trade depends on the relative elasticities of demand for each other’s produce by the trading countries. A country which has a more intense demand for the goods of the other country will have unfavourable terms of trade, so it will be the loser and the opposite country will be the gainer.

In modern economic analysis, Ohlin, however, feels that it is not worthwhile discussing the question of the total gain from trade or its division between the trading countries. Trade ultimately leads to equalisation of factor prices everywhere, so that, the gain from international specialisation may be largely offset.

Moreover, any analysis of the gain from trade on the assumption of unchanged conditions is futile in a dynamic world. When trade causes many radical changes: changes in demand pattern, introduction of new goods, new methods new goods, new factors, new territories, etc., in the trading countries, the very basis for comparison of total gain vanishes in air.

Ohlin, however, opines that the concept of gain has some meaning in the increase in index of production due to a minor variation in trade Such an index which does not cause any change in the demand pattern and distribution of income, but conveys an improvement in the economic position of the country, obviously represents the size of the gain.