“Identify and Explain Carefully Four Sources of Gains from International Trade. Do You Associate One or More of These Sources of Trade Gains with the Underlying Economic Characteristics of Countries That Trade with Each Other?”

Topics: International trade, Economics, Comparative advantage Pages: 8 (3055 words) Published: April 9, 2011
There are multiple causes of trade that are discussed in terms of gains from trade. Following World Trade Report (WTR) (2008) categorisation, there are gains from trade which result from trade in accordance to traditional theories of trade, such as Ricardian model and Heckscher-Ohlin (H-O) model, from trade according to “new” trade theories, which focus on economies of scales and imperfect competition, as well as from trade in accordance to “new-new” trade theories, which explores the gains from productivity. In addition, WTR (2008) points out that there are also dynamic gains from trade such as knowledge spill-overs and the fact that trade can accelerate economic growth. The essay will focus only on four sources of gains from international trade, namely, gains from specialisation based on comparative advantage, benefits of economies of scales, increase in range of goods available to consumers and knowledge spill-overs. The paper will stress that there are some restrictions on how those gains are achieved and whether every country can actually achieve them. The paper concludes it is possible to spot these gains in current international trade relations associated with economic characteristics of the countries’ that trade with each other. The most common and well-understood gain, representative of traditional trade theories, is a gain from specialisation. There are two theories that support the fact that gains from specialisation are strongly encouraged by international trade, and from one of them are another three theories derived. From the former ones, two different types of gains from specialisation can be distinguished. That is to say, there is gain from specialisation that follows from differences in technology, represented by Ricardian trade model, and another that follows from differences in factor endowments, represented by H-O model (Krugman and Obstfeld, 2006) and supported by Stopler-Samuelson theorem, Rybczynsky theorem and the factor-price equalisation theorem (WTR, 2008). Ricardian model states that technological differences between countries lead to gains from trade through comparative advantage (Krugman and Obstfeld, 2006). The model is based on various assumptions (Krugman and Obstfeld, 2006; Low, 2010), namely, there are two countries producing two goods, with labour as a single production factor producing at constant return to scale in the environment of perfect competition (ibid). Ricardo (in Krugman and Obstfeld, 2006) emphasizes that trade is based on comparative advantage, as opposed to absolute advantage. The latter means that you can produce the same amount of good at lower cost, while the former expresses the same but in terms of opportunity costs (ibid). If the country has comparative advantage in producing a good, then the cost of not producing something else is lower than it is in other countries (ibid; Low, 2010). In the Ricardian model what matter is a relative price which would dictate a relative efficiency. As a result, the countries will produce different goods or at least in very different quantities, and since the production is effective, that is, at lowest possible opportunity costs, leading to consequent raise of welfare. However, the model lacks some flexibility. It is not able to accommodate for changes in trade environment and does not consider such factors as trade barriers, intermediate inputs, market failures and non-constant returns to scale (WTR, 2008). Likewise, as it is based on the notion of relative prices of the goods a country produce, similarly to Pareto optimum, comparative advantage does not mean that the result following from it is fair, since one country might not gain at all (Krugman and Obstfeld, 2006). Similar to Ricardian model, is Heckscher-Ohlin (H-O) model, which likewise belongs to traditional trade theories and acknowledges gain from specialisation. However, here the gains from trade through specialisation are driven by differences in resource endowment between...

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