Question

Explain two di¤erent ways in which we can illustrate gains from trade.

Answer 1

Gains from trade refers to the increased profit of producers with the increased production of goods due to heavy demand from customers' side. International trade provides the opportunity to producers to produce extra to cater the increased consumption which in turn brings gains from trade. The gains from trade can be divided into two types-

1) Static gains:- Advantages of labour and specialisation of technologies result in gains from trade. So international trade happens between countries who see net advantages in their import and export of products. A Country having specific raw materials specialise in producing a product whose production costs are cheaper. So an another country would like to exchange goods with this country in exchange of products whose production costs would be higher in the first one country. Thus production of goods increases nationally and internationally resulting into comparative advantages and gains from trade with the increasing consumption. National income and welfare of people also go up with entering into international trade relation when there is net benefit from such types of exchange of goods in trade.

2) Dynamic gains:- When a country enters into the export and import of goods for international and domestic consumption, its market size increases many times as more and more investments pour into the market leading to the establishments of factories, industries, service sectors; development of infrastructures, tools & machineries and technologies. People try to establish new business models for marketing and exporting which increases the employment opportunities for the local people which in turn help in the growth of national economy.