Q.2)What are the Factors Determine Size of Gain of International Trade?
Following are the important factors determining the size of gain and its proportion:
1. Nature of Terms of Trade
Terms of trade, i.e., the rate at which one country's goods exchange against those of another, tend to affect the size of gain from trade. Terms of trade may be favourable or unfavourable to a country.
2. Difference in Cost Ratios
According to Harrod, the gain from international trade depends on the relation between the ratio of the costs of production in the two countries concerned. The gain does not depend on the comparative cheapness of producing commodity X or Y in the two countries.
It depends on the relation between the ratio of the cost of production of X to that of Y in one country and the ratio of the cost of production of X to Y in the other country. Gain is possible if the cost ratios are different in different countries.
3. Productive Efficiency of the Country
The gain from international trade also depends upon the relative productive efficiency of the country. If the productive efficiency of the home country increases, it will be to the advantage of the foreign country (and vice versa), for it will lead to more favourable terms of trade for the latter.
4. Relative Elasticity of Demand
The gain from international trade also depends upon the relative elasticity of demand for the commodities in different countries and the relative elasticity of supply of different commodities in different countries.
5. Factor Endowments and Technological Conditions
There exists a positive correlation between the size of foreign trade and the total gain reaped by the participating nations. However, kinds and quality of factors available to a country and its technological advancement has unique significance in this regard.
Following are the important factors determining the size of gain and its proportion:
1. Nature of Terms of Trade
Terms of trade, i.e., the rate at which one country's goods exchange against those of another, tend to affect the size of gain from trade. Terms of trade may be favourable or unfavourable to a country.
2. Difference in Cost Ratios
According to Harrod, the gain from international trade depends on the relation between the ratio of the costs of production in the two countries concerned. The gain does not depend on the comparative cheapness of producing commodity X or Y in the two countries.
It depends on the relation between the ratio of the cost of production of X to that of Y in one country and the ratio of the cost of production of X to Y in the other country. Gain is possible if the cost ratios are different in different countries.
3. Productive Efficiency of the Country
The gain from international trade also depends upon the relative productive efficiency of the country. If the productive efficiency of the home country increases, it will be to the advantage of the foreign country (and vice versa), for it will lead to more favourable terms of trade for the latter.
4. Relative Elasticity of Demand
The gain from international trade also depends upon the relative elasticity of demand for the commodities in different countries and the relative elasticity of supply of different commodities in different countries.
5. Factor Endowments and Technological Conditions
There exists a positive correlation between the size of foreign trade and the total gain reaped by the participating nations. However, kinds and quality of factors available to a country and its technological advancement has unique significance in this regard.
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