Question

why might exposure to foreign trade hurt the economic development of poor countries? clearly explain using the relevant facts and model

Answer 1

First, let us understand what are benefits and costs of trade for India as an example.This applies to all economies.

Positives of International Trade --

For consumers: Due to international goods- Customers get varied choices. Low price goods can be chosen. Consumers get more choices and due to intense competition the prices go down. Companies come with better products and economies of scale improves resource allocation.

For citizens: indiam citizens get more jobs in industries where comparative advantage is with India. for ex- advanced weapon making industry. India industrialists can outsource a few operations and can focus on core products which will give its citizens higher paid jobs in services industry.

For Indian Economy: Countries with absolute and comparative advantage will get advantage of economies of scale. Productive and allocative efficiency will be encouraged. Through exports India can run engine of growth.

Negatives of International Trade --

For Indian consumers: Indian consumers may get goods where child labor is used or proper quality is not maintained. Strategic data may be stolen by products coming from other countries.

For Indian citizens: Over dependence for a particular product from a certain country. Infant industries in India may not be able to withstand and new start ups may be upset.

for Indian Economy: Cheaper imports may cause difficulties for US producers and jobs may be lost. Indian currency value may go down if imports are more than exports.

When it comes to developing countries- It has following charactristics- Infant industries, dependence on primary sector, low levels of technological progress, low capacity of government to support industries, less human capital development.

When a developing country exports goods- it mainly exports agriculture based goods which are inelastic in demand whereas it mainly imports manufactured goods with elastic demand. During booms and recessions both agricultural goods suffer. Once borders are open then advanced machine made goods enter into markets which act as competitors for domestic companies and these companies close down creating unemployment. This also leads to income inequality.

Overdependence also reduces countrys capacity to produce and this reduces scope for market expansion and lessens eceonomic growth rate.