Question

Describe the role of human capital in international trade

Answer 1

Human capital relates to an economy's expertise, skill sets, and experience of employees. The abilities provide economic value as a skilled workforce can lead to higher productivity. Human capital concept is the realization that not everyone has the same sets of skills or expertise. In addition, by investing in education for people, the quality of job can be enhanced.

Over the past few years, literature has largely studied the connection between human capital, openness to international trade and economic growth. The main contributions were created in this regard within the framework of the theory of endogenous growth. This research strand encompasses a variety of theoretical and empirical studies that emerged as a reaction to the neoclassical growth model during the 1980s. The new theories of development have given persuasive intellectual assistance for the proposition that information, human capital, and technological advancement sustain economic growth.The existence of a positive correlation between a country’s degree of openness to international exchange and its growth performance is a well-documented empirical regularity, that is almost universally accepted by economists.

International trade opens communication channels that facilitate the exchange of technical information on innovative products and new manufacturing methods.
Second, trade provides entrepreneurs at each place with a strong incentive to pursue new and distinctive thoughts and techniques by creating competition between companies in distinct nations. Third, economic integration expands any producer's market size. Finally, opening up trade between nations induces separate patterns of specialization for each trading partner in separate manufacturing operations.

The new paradigm of endogenous growth has spurred a spate of research that tried to test empirically the contribution of these factors to total factor productivity growth.International trade proves beneficial because it continuously creates new opportunities and activities to which the workers can shift and hence avoid diminishing returns to scale associated with the learning process.