International trade

  • Created by: nikoamiko
  • Created on: 15-04-15 11:51

international trade benefits

international trade is a coming of buyers and sellers for trade across the international borders. In theory, international trade should lead to rise in economy`s real GDP,  because when the economy is open to trade, greater volumes of exports will be traded , which will create an additional income. the economies that have comparative advantage in goods and services will gain greater export revenue, which will raise AD, leading to short term economic growth. Furthermore, there will be a gain in dynamic efficiency, because , the economies are likely to benefit from knoweledge and technology transfer, this will happen through collaboation with foreigh firms,  licencing arrangements  and FDI. with up to date technology and capital from IT, developing economies are likely to move away from primary sector production and diversify its production to secondary sector goods and services. hence, international trade will create sustainable and long term economic growth. there will be a productivity gain, IT will put a downward pressure on profit margins for domestic firms  and they will have an incentive to improve its quality and quantity of G&S.

however, the extent to which an economy will benefit from international trade depends upon the terms of trade, developed economies are most likely to benefit from IT, because they hold a comparative advantage in capital intensive production, therefore, they will have improving terms of trade, because the value of their services will be greater than the value of primary commodities produced by developing economies. over time more and more primary commodities will need to be exported to pay for the same volume of secondary G&S, this will trap them in low development. developing economies will face declining terms of trade and therefore are unlikely to benefit from international trade. This is likely to lead to trade deficit, which will adversely affect AD, leading to fall in economic growth,

if there are trade restrictions imposed on exports from main trading economies, in the form of quotas and tariffs, then this will reduce the price competiteveness of exports, therefore, the volume of exports traded should fall, reducing the size of export revenue and AD, leading to fall in economic growth, therefore, the extent to which IT will create economic growth depends upon the price elasticity of demand for exports, and if there is a global recession, there will be less global demand for exports and therefore, economic growth may not happen.

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