Gains from Trade Gains from trade: Advantages that accrue to a country from engaging importing and exporting

relationships. In an absolute advantage framework, gains from trade are identified as a net gain between consumer and producer surplus effects. In a comparative advantage framework, gains from trade are identified as an increase in consumption of all goods. It is commonly described as resulting from:

specialization in production from division of labor, economies of scale, scope, and agglomeration and relative availability of factor resources in types of output by farms, businesses, location andeconomies

a resulting increase in total output possibilities trade through markets from sale of one type of output for other, more highly valued goods.

To this point, we have seen that, given a pattern of comparative advantage, it is possible for a country to give up autarky in favor of importing and exporting. But should a country actually do this? We can answer this question by examining Figure 3.4 once again.

Notice that the post-trade consumption points C are up and to the right of the autarky consumption points A. This directional relationship between points A and C means that the movement from autarky to trade increases consumption of both rice and motorcycles. Increased consumption of both goods, in turn, implies that economic welfare has increased. Vietnam and Japan have experienced mutual gains from trade based on comparative advantage.

Measurement of gains from trade Classical Economist there are two methods to measure the gains from trade;- 1) international trade increases national income which helps us to get low priced imports. 2) gains are measured in terms of trade. To measure the gains from the trade comparison of cost of production between domestic and foreign countries is required. But it is very difficult to acquire the knowledge of cost of production and cost of imports in domestic country. Therefore terms of trade method is preferable to measure the gains from trade.

Factors affecting gains from trade There are several factors which determine the gains from international trade: 1.Differences in cost ratio: The gains from international trade depends upon the cost ratios of differences in comparative cost ratios in the two trading countries.If the difference between exchange rate and cost of production is lesser than lesser will be the gains from trade and vice-verse. 2. Demand and supply: If a country has elastic demand and supply it gives more gains from trade vice-verse with inelastic demand and supply. 3. Factor availability: International trade is based on the specialization and a country specializes depending upon the availability of factors of production. It will increase the domestic cost ratios and so the gains from trade. 4. Size of country: If a country is small in size its easy for them to specialize in the production one commodity and export the surplus production to a large sized country and can get more gains from international trade. Whereas if a country is large in size then they have to specialize in more than one good because the excess production of only one commodity can

not be exported fully to a small sized country as the demand for good will reduce very frequently. so smaller the size of the country larger is the gain from trade. 5. Terms of Trade: Gains from trade will depend upon the terms of trade. If the cost ratio & terms of trade are closer to each other more will be the gains from trade of the participating countries. 6. Productive Efficiency: An increase in the productive efficiency of a country of a country also determines its gains from trade as it lowers the cost of production and price of the goods.as a result the country importing gains by importing cheap goods.

Static and dynamic gains from trade The gains from trade can be classified into static and dynamic gains from trades. Static Gains means the increase in social welfare as a result of maximized national output due to optimum utilization of country's factor endowments or resources. Dynamic gains from trade, are those benefits which accelerates economic growth of the participating countries. Static gain's are the result of the operation of the theory of comparative cost in the field of foreign trade. On this principle countries make the optimum use of their available resources so that their national output is greater which also raises the level of social welfare in the country. When there is an introduction of foreign trade in the economy the result is called the static gains from trade. Dynamic gains from trade relate to economic development of the economy. Specialization of the country for the production of best suited commodities which result in a large volume of quality production which promotes growth. Thus the extension of domestic market to foreign market will accelerate economic growth.

Some caveats from gain of trade. First, the gains from trade occur for the country as a whole. The fact that a country as a whole benefits in the aggregate from trade does not mean that every individual or group within the country benefits. Indeed, there are good reasons to expect that there will be groups that lose from increased trade. These groups will oppose increased trade deficit the overall gains to

their country. For example, rice producers in Japan have a long history of opposing imports of rice. Second, in recent years, there has been a great deal of discussion of the impacts of trade based on comparative advantage on the environment. It is sometimes alleged that international trade is almost always detrimental to the environment. However, the situation is not always this straight forward. Both theoretical and empirical results demonstrate that increased trade can be either good or bad for the environment, and that we need to approach the trade and environment issue on a case-by-case basis. A case in which trade based on comparative advantage has detrimental environmental impacts on a country is given in the box. Third, some goods are traded that do not contribute to increased welfare. Lane mines, heroin, and prostitution services are all traded internationally, but their consumption significantly reduces welfare rather than increased it. For this reason, you need to be careful not to generalize the gains from trade concept too far.