Trade as a Engine of Economic growth

• Trade, undoubtedly, has several benefits.

• It promotes growth and enhances economic welfare by stimulating
more efficient utilisation of factor endowments of different regions
and by enabling people to obtain goods from efficient sources of
supply.
• Trade also makes available to people goods which cannot be
produced in their country due to various reasons.
• The role of trade in enhancing consumer’s choice (even delight) is
tremendous.
Benefits of trade in case of less developed
countries
• 1. Trade provides material means (capital goods, machinery, and raw
and semi-finished material) indispensable for economic development.
• 2. Trade is the means and vehicle for the dissemination of
technological knowledge, the transmission of ideas, for the
importation of know-how, skills, managerial talents and
entrepreneurship.
• 3. Trade is also the vehicle for the international movement of capital,
especially from the developed to the underdeveloped countries.
• 4. Free international trade is the best anti-monopoly policy and the
best guarantee for the maintenance of a healthy-degree of free
competition.
 Gains from International Trade
The gains from international trade under two heads.
They are
(a) Static gains
(b) Dynamic gains
Static gains from Trade
• Static gains arise out of optimum utilisation of a country's factor resources.
Theutilisation of resources to the optimum level contributes to increasing
national outputand social [Link] gains comprise of the following
gains:
• (i) Specialisation and Division of Labour
• International trade leads to specialization and geographical division of
[Link] country specializes itself in the production of that commodity
for theproduction of which it enjoys a comparative cost
[Link] tradebrings about all the advantages of
specialization and division of labour at theinternational level.
• (ii) Maximisation of Production
• As a result of specialization and division of labour each country seeks topro
duce to the maximum extent [Link], trade among countries leadsto
the maximization of world's output.
(iii) Maximisation of Welfare
• By maximizing production,inter national trade makes available a large
quantity of goods f or consumption, Thiswill have a positive impact on the
economic welfare of the people world over.
• (iv) Rise in National Income
• International trade leads to a rise in national income because of the
increasein employment and [Link] will be a rise in per-capita
income also.
• (v) Use of Surplus Resources
• International Trade provides opportunities to a country to exploit its
[Link] is due to the widening of the market made possible b
yinternational trade
 Dynamic Gains
• Dynamic Gains of international trade are those gains that contribute significantly to the
promotion of economic growth of the trading countries concerned. The following are the
dynamic gains of international trade:
• (i) Widening of the Market
• An important gain of international trade is that it enlarges the size of the market for the
products of trading countries.
• This is of much importance to those countries which have surplus output to dispose off .
• Widening of the market contributes significantly to an increase in specialization
encouraging innovations and inventions.
• As a result, there will be an increase in productivity
and profit, contributing in the process, to an increase in economic growth.
• (ii) Educative Benefit
• The educative gain of international trade lies in its transfer of skills from one country to
another. These skills include technical know-how, managerial skills,
enterprise, ideas etc. The less developed countries will be immensely benefited as the
recipients of these skills.
• (iii) Efficient Utilization of Resources
• International trade, based on comparative cost advantage, brings about
efficient utilization of the resources of the trading countries concerned. Resources
will be put to the optimum use.
• (iv) Capital Accumulation
• The need to buy foreign goods and thereby increase consumption and the
standard of living motivates people to save more. This will Contribute to increasing
capital accumulation.
• (v) Capital Movements
• A significant gain from international trade lies in that it leads to capital movements
from one country to another .This is of much advantage to the less developed
countries.
• (vi)Advantages to Less Developed Countries
• Trade brings enormous gains to the less developed countries. These
countries can import capital, technical know-how, managerial skills etc. All
this helps to accelerate the pace of economic growth of these countries. Thus, the
gains from international trade are many and varied
Prebisch-Singer Thesis
• There is empirical evidence related to the fact that the terms of trade
have been continuously moving against the developing countries.
• On the basis of exports statistics concerning the United Kingdom
between 1870 and 1940, Raul Prebisch demonstrated that the terms
of trade had secular tendency to move against the primary products
and in favor of the manufactured and capital goods.
• This viewpoint has been strongly supported by H. W. Singer.
• The essence of Prebisch-Singer thesis is that the peripheral or LDC’s
had to export large amounts of their primary products in order to
import manufactured goods from the industrially advanced
countries.
• Prebisch and Singer maintain that there has been technical progress
in the advanced countries, the fruit of which have not percolated to
the LDC’s.
• In addition, the industrialised countries have maintained a monopoly
control over the production of industrial goods.
• They could manipulate the prices of manufactured goods in their
favour and against the interest of the LDC’s.
• Except the success of OPEC in raising the prices of crude oil since mid
1970’s, there has been a relative decline in the international prices of
farm and plantation products, minerals and forest products.
• Consequently, the terms of trade have remained unfavourable to the
developing countries.
 Assumptions in the Prebisch-Singer thesis
• (i) As income rises in the advanced countries, the pattern of demand shifts
from primary products to the manufactured products due to Engel’s law.
• (ii) There is slow rise in demand for products in the developed countries.
• (iii) The export market for product of LDC’s is competitive.
• (iv) The export market for products of developed countries is monopolistic.
• (v) Wages and prices are low in LDC’s.
• (vi) The appearance of substitutes for products of LDC’s reduces demand for
them.
• vii) The economic growth in the LDC’s is indicated by income terms of trade.
• Singer has pointed out that the recent increase in debt problem of the
LDC’s has imparted another twist to the hypothesis of secular
deterioration of terms of trade for them in two ways.
• Firstly, a high proportion of proceeds from exports are not available for
imports.
• Secondly, there is an increased pressure upon the LDC’s to raise exports in
order to repay external debts on account of IMF-induced adjustment
polices.
• These pressures make the debt- ridden LDC’s to compete with other poor
countries to enlarge their export earnings.
• It results in decline in the prices of export products of these countries.
Criticisms of Prebisch-Singer Thesis
(i) Not Firm Basis for Inference:
The inference of secular deterioration of terms of trade for the LDC’s
rests upon the exports of primary vis-a-vis manufactured products.
(ii) Faulty Statement of Gains and Losses of Primary Exporters:
Jagdish Bhagwati has pointed out that the index of terms of trade
employed in this thesis understates the gains of exporters of primary
products.
(iii) Faulty Index of TOT:
This index overlooks the qualitative changes in products, appearance of
new varieties of products, services like transport etc.
 • Neglect of Supply Conditions:
In the determination of terms of trade, the Prebisch-Singer thesis considers
only demand conditions.
• Little Effect of Monopoly Power:
One of the arguments in support of this thesis was that the higher degree of
monopoly power existing in industry than in agriculture led to secular
deterioration of terms of trade for the developing countries.
• Benefits from Foreign Investment:
• The deterioration of the terms of trade for the LDC’s is sometimes linked
not to non-transmission of productivity gains to them by advanced
countries through lower prices of manufactured goods, yet the benefits
from foreign investments have percolated to the LDC’s through the product
innovations, product improvement and product diversification.
Free Trade Vs Protectionism
• All economies, regardless of their size, depend to some extent
onother economies and are affected by events outside their borders.
• If there were an Economist’s Creed it would surely contain the
affirmations: ‘I understand the principle of comparative advantage’
and free trade’”Paul Krugman
• Trade Protection (Protectionism) - Policies that limit imports, usually
with the goal of protectioning domestic producers in
import-compelling industries from foreign competition
Myrdal Theses
• The Myrdal theses and free trade represent two different
perspectives on the role of international trade in economic
development. Let’s discuss each of them separately.
• Myrdal Theses: The Myrdal theses were proposed by Swedish
economist Gunnar Myrdal in his influential book “Asian Drama: An
Inquiry into the Poverty of Nations” published in 1968.
• Myrdal argued that the prevailing patterns of trade and development
were inherently unequal and perpetuated underdevelopment in the
Global South. He highlighted the following points
• a. Cumulative Causation: Myrdal emphasized the concept of
cumulative causation, which suggests that initial economic
advantages lead to further growth and development, while initial
disadvantages create a vicious cycle of poverty and
underdevelopment.
• According to Myrdal, the international trading system tends to
reinforce existing
• inequalities between developed and developing countries.
• b. Structural Dependency: Myrdal also argued that developing
countries faced structural dependency on developed nations due to
their reliance on primary commodity exports. He believed that this
dependence on exporting raw materials without sufficient created a
vulnerable position for developing countries in the global economy.
• State/Government Intervention:
• Myrdal advocated for state intervention and planning as a means to
address the structural imbalances created by international trade. He
proposed policies such as import substitution industrialization (ISI),
where countries develop their domestic industries to replace
imported goods, and economic planning to promote equitable
development.
• State/Government Intervention: Myrdal advocated for state intervention and
planning as a means to address the structural
• imbalances created by international trade.
• He proposed policies such as import substitution industrialization (ISI), where
countries develop their domestic industries to replace imported goods, and
economic planning to promote equitable development.
• Free Trade: Free trade, on the other hand, is an economic concept that advocates
for the absence of barriers or restrictions on the movement of goods and services
between countries. Supporters of free trade argue that it brings several benefits
• a. Comparative Advantage: Free trade allows countries to specialize in the
production of goods and services in which they have a comparative advantage.
This leads to increased efficiency, productivity, and economic growth
• b. Lower Prices and Increased Variety: By eliminating trade barriers, free trade
promotes competition, which drives down prices and provides consumers with a
wider range of products to choose from. This enhances consumer welfare and
increases living standards.
• c. Resource Allocation: Free trade enables countries to allocate their
resources more efficiently by focusing on industries where they have a
comparative advantage. This leads to the optimal utilization of resources and
overall economic efficiency.
• d. Global Economic Integration: Free trade fosters economic integration and
cooperation among nations. It encourages interdependence, promotes
peace, and reduces the likelihood of conflicts by creating shared economic
interests
• Myrdal theses critique the prevailing patterns of trade and development,
highlighting their unequal nature and the need for state intervention to
address structural imbalances.
• On the other hand, free trade advocates for the removal of trade barriers,
emphasizing the benefits of specialization, competition, and resource
allocation. These perspectives represent different views on the role of
international trade in economic development, and the debate between them
continues among economists and policymakers.
World Trade Organization
• The World Trade Organization, also known as WTO, is a Global
organization that deals directly with making rules and regulations
among the Nations with respect to trading.
• It was constituted on the 1st of January 1995. India also joined the
WTO in 1995 and is a founding member of the World Trade
Organization.
• WTO is headquartered in Geneva, Switzerland, and it consists of 164
countries, where 160 are United Nations countries, along with the
EU, Hong Kong, Macau, and Taiwan.
• Apart from this, WTO also acts as a forum that negotiates the trading
agreement and settles down trading disputes among countries by
providing support and a full feeling of the needs of developing
countries
Objectives of the WTO
• WTO aims to reduce barriers to trade and promote economic growth and
development among its member countries. Let’s explore the major
objectives of WTO below.
• To limit the trading barriers by negotiating. This results in a reduction in the
prices of goods and services, which in turn results in a reduction in the cost
of living.
• Stimulating economic growth and development, and employment
opportunities
• Limit the cost of international business activities.
• To promote the concept of good governance.
• To reduce the trade disputes among the countries.
• Collaborating with leading financial institutions to boost economic
management.
 Functions of WTO
• The functions of the WTO are numerous and critical in facilitating a fair and
open international trade system. The major functions of WTO include the
following.
• It regulates the laws related to trade agreements.
• Organize the conferences for trade negotiations.
• Sort out and resolve the issues related to trading.
• examines trade-related policies
• Consult and cooperate with economic organizations.
Role of Trade
• Trade Development:
• The main objective behind the emergence of the WTO is to maintain
the free flow of trade as much as possible without any undesirable
consequences like unfair competition, hegemony in a certain variety
of goods or services, biassed trade policies, etc.
• WTO helps the inclusion of developing countries in the international
trading system and helps them to achieve economic growth and
ensure full employment.
• It oversees the trade rules and policies governing international trade
and ensures that they are transparent and easily predictable.
• Dispute settlement:
• In conducting international trade, several trade disputes also arise due to
the conflicting interests of one nation and those of another nation. These
disputes have been settled or negotiated by the WTO, which also involves
the interpretation of WTO agreements.
• The WTO, as a neutral body, settles these disputes in accordance with the
Dispute Settlement process provided in WTO agreements.
 Pillar of Economic Relations
• Dispute settlement is the central pillar of the multilateral trading system,
and the WTO’s unique contribution to the stability of the global economy.
• The primary goal of WTO is to give an open and free trade space to
international traders where they can do trading without any obstruction.
• It makes and implements the rules related to international trading.
• It creates a venue for liberalization negotiation and trade monitoring.
• It makes decisions that are more transparent and fair with all the member
countries.
• It also works with other important economic Institutions and works actively
for Global economic management.
• It opens the ground and provides a platform to the countries that can take
advantage of WTO for the global Trading system.
Developing Country Status in WTO
• There are no WTO definitions of “developed” and “developing”
countries. Members announce for themselves whether they are
“developed” or “developing” countries.

• However, other members can challenge the decision of a member to make

use of provisions available to developing countries.
• The WTO Agreements contain special provisions which give
developing countries special rights. These provisions are referred to
as “Special and Differential Treatment” (S&D) provisions.
• The special provisions include:

• Longer time periods for implementing Agreements and commitments,

• Measures to increase trading opportunities for developing countries,
• Provisions requiring all WTO members to safeguard the trade interests of
developing countries,
• Support to help developing countries build the capacity to carry out WTO
work, handle disputes, and implement technical standards, and
• Provisions related to least-developed country (LDC) Members.
 Benefits to Developing Countries in the
WTO:
• The Agreement Establishing the World Trade Organization (also known as “the
WTO Agreement”) specifies that international trade should benefit the
economic development of developing and least-developed countries.
• General Agreement on Tariffs and Trade (GATT)— gives developing countries
the right to restrict imports, if doing so would promote the establishment
or maintenance of a particular industry, or assist in cases of
balance-of-payments difficulties.
• Part IV of the GATT includes provisions on the concept of non-reciprocal
preferential treatment for developing countries, i.e. when developed countries
grant trade concessions to developing countries they should not expect the
developing countries to make matching offers in return.

• However, developing countries claim that Part IV has been without practical value as
it does not contain any obligations for developed countries.
Foreign Trade

• Foreign Trade is the exchange of goods and services between two

countries in the international market.
• It helps in the availability of raw material/finished product in a
country that either does not have it or has it in scarcity.
• No country is self-sufficient in terms of natural or man-made
resources,, so it is prudent to approach other countries that have
them in abundance.
Types of Foreign Trade
• There are three different types of foreign trade, which are as follows:
• Import trade: It is the purchase of goods and services by one country from
another country. Here the flow of goods is from a foreign land to the home
nation. Countries import goods and services when they need raw materials for
producing goods or when they need a finished product for domestic
consumption.
• Export trade: It is the selling of goods and services to another country. Here the
flow of goods is from the home nation to a foreign land. Countries export goods
and services to another nation when they have that particular commodity in
abundance.
• Entrepot trade: This process is also called re-export. In this form of trade, a
business purchases goods or services from one country, reprocesses those
products, and then sells them to another country.
 Benefits of Foreign Trade:
• Foreign Trade has many benefits for all the countries involved in it. Some of the
advantages of exchanging goods in the international market are as follows:
• Foreign Exchange: Foreign Trade helps countries get access to foreign currency and
boost up their reserves. This currency is essential when it comes to paying for imports
of goods and services.
• Consumers get more options: People from one country enjoy superior quality goods
and services from other nations. They would not have gained access to these products
were it not for International trade. These products can also help them improve their
standard of living in the long run.
• Optimum use of a nation’s resources: No country can fulfil all its consumption needs
independently. They have to depend on other nations for specific products.
International trade allows them to procure raw materials/finished products that they
don’t have. It helps countries focus on producing what they are good at and help
increase efficiency in the production process of those products.
• Economic Benefits: International trade generates employment opportunities for
organisations and countries involved in the export/entrepot of goods and services. It
also helps to improve the Gross Domestic Product for that country.
 Foreign Investment

• Foreign Investment is the inflow of capital into a country through

individuals/institutions from a different country.
• The flow of capital is from one organisation, with its headquarters in a
foreign nation, into another company that belongs to the home nation.
• The investment helps companies based abroad to set up their offices or
manufacturing units in another country.
• Since the foreign entity gets a stake in the domestic company in exchange
for providing capital, they have to follow local government rules and
regulations regarding such investments.
Types of Foreign Investment
• There are three different ways in which a company belonging to one
country can invest in another country. These methods of investment
are as follows:
• Foreign Direct Investment: This type of investment involves a foreign
company infusing capital into another country’s business or
production units.
• Foreign Portfolio Investment: When an organisation based outside
the country invests in the securities market of that country, it
becomes a foreign portfolio investment.
• Foreign Institutional Investment: This is a form of investment by a
foreign-based company in the passive holdings of an entity in another
country.
 Benefits of Foreign Investment
• The main advantages of foreign investment are as follows:
• Economic growth: Infusion of foreign capital helps domestic companies
increase production and generate employment. It can also boost
consumption in the market since the workforce in those companies will
have greater purchasing power. It contributes to the overall growth of a
country’s economy.
• Resource transfer: Foreign investment brings capital and helps the
domestic workforce get access to new technologies and skills. It will help in
improving their productivity while also developing the quality of goods and
services produced.
• Cost benefits: Foreign investment can help domestic companies improve
production efficiency and reduce costs via access to better technologies.
Differences between Foreign Trade and Foreign
Investment
Foreign Trade Foreign Investment
Meaning
It involves the exchange of goods and services between two countries It involves the investment made by a foreign company into another
in the international market. company based in a different country.

Purpose
The main purpose of foreign trade is as follows: The primary purpose of foreign investment is as follows:
•To help countries access goods and services that they need from •Gain access into the market of another country by providing capital and
international markets. getting a stakeholding in a local company.
•To sell their products in those markets and earn foreign exchange. •Use that access to conduct business and make profits.

Benefit
Access to international markets for domestic companies. Access to long term capital to a company via foreign investors.

Flow of resources
Foreign trade enables both inflow and outflow of raw materials/finished The foreign investment enables the inflow of capital and technologies
products between countries. into a country from abroad.

Types
The three types of foreign trade are as follows: The three types of foreign investment are as follows:
•Import •Foreign Direct Investment
•Export •Foreign Portfolio Investment
•Entrepot •Foreign Institutional Investment