Question

Is it possible to estimate the gains from trade? Explain in detail when it can be estimated AND when it can’t.

Answer 1

Gains from trade in the context of economics is a situation in which both parties enter into mutual cooperation that makes both the parties better off. It is estimated in terms of consumer surplus plus producer surplus incurred from lower tariffs.

According to Classical economists, there are two methods of measuring gains from trade; one, increases international trade which helps us to get low priced import and gains are measured in terms of trade. In order to calculate the gains from trade requires comparing the cost of production of the domestic country and foreign country.for the same product. It is difficult to estimate the cost of production and cost of imports.

If the size of the country is small, it is relatively easy to specialize in the production of one commodity and export the surplus to a larger country and get more gains from trade whereas if the country is large, it has to specialise in more than one commodity and the excess production cannot be exported to just one small country. So the size of the country should be small to incur gains from trade.

The difference in cost ratio implies the difference between exchange rate and cost of production if smaller then gains from trade will be small and vice versa.

If demand and supply for a commodity are elastic then gains from trade are higher otherwise not.