Answer to Question #259238 in Economics for Kame

Question

4) Who receives the gains from international trade, and can trade be used successfully as an engine of broad development? What policies can affect this under different circumstances?

Answer 1

Providing an opportunity to talk about a particular pair of national economies of mutually beneficial foreign trade relations based on comparative advantages. However, even in this case, regardless of the presence of the corresponding comparative advantages, we can talk about the feasibility of developing trade.

Economies of scale. Counting on the occurrence of this effect, a country can begin to increase the output of a certain type of product, producing them in volumes that significantly exceed domestic needs, and channeling the surplus into international trade channels. As you know, it is customary to distinguish two types of economies of scale - internal and external. In the first case, we are talking about an increase in the volume of output. In the second case, it is created as a result of an increase in the number of operating enterprises.

For us, the fact that both of these options lead to a decrease in the cost of production is of fundamental importance. And this, under certain circumstances, in turn, will be the formation of comparative advantages. In a sense, the establishment of foreign trade relations will create the preconditions for their own subsequent existence. This factor is most tangible for small countries to provide sufficient conditions for the development of large-scale production.

Stimulating competition. It is well known that competition in such cases has a beneficial effect on the state of the national economy, forcing manufacturers to improve the quality of their products, renew their assortment, and reduce production costs. In order to create and maintain competitive conditions at the proper level, the relevant government bodies carry out the processes of mergers and acquisitions, regulate the activities of natural monopolies, etc.

However, international trade can serve the same purpose. Regardless of what type of foreign trade operations is developing - export or import, domestic economic entities are forced to emerge with the emergence (sometimes many times) of competitors. For the companies themselves, of course, competition is fraught with difficulties, problems, and costs. However, this ultimately benefits the whole society as a whole.

Trade as a “locomotive of development”. In modern conditions, the economy of a developed country is a complex national economic complex, within which numerous industries are united. These industries differ not only in the nature of a given product but also in that role. In a number of cases, it is the development of foreign trade relations that make it possible to avoid an economic crisis. The most obvious leading example of this kind is the global exporter, Germany. Only an increase in its export supplies has provided the country with positive values ​​of GDP growth in recent years.

From a theoretical point of view, if a particular national economy exports products, the demand for which shows a high positive elasticity of income, it reasonably expects a dynamic increase in export earnings. The funds are received on the basis of the functioning of the system of cooperative ties, stimulating the growth of economic activity in other sectors of the national economy. Provided that economic policy is pursued, it can be partially accumulated in the state budget and directed to the modernization of strategically important tasks or solving priority tasks.

National differences in demand. Suppose in country A users prefer lamb and in-country B they prefer beef. Let us also assume that favorable climatic and economic conditions are best suited for the production in both states of another type of meat in proportions of 50:50. In this situation, none of the farmers of the second country should redistribute resources to maximize the production of goods that are in demand on the domestic market. On the contrary, it takes exactly as much as the climatic and economic conditions require. At the same time, in foreign trade, surplus mutton produced in country B will be sent to consumers in country A. Towards it, to the delight of consumers in country B, beef produced in A will go.