Foreign Trade Gains
In a relative sense, larger the country smaller would be the gains form trade and the smaller he country larger would be the proportion of gains enjoyed. A large country’s resources are well utilised with the economics of scale on account of big domestic market and its labour is more efficient comparatively on account of technical improvements, so the domestic production costs of practically all goods will be lower as compared to other small countries. Hence, its domestic prices will not be very different from the world market prices. Gains from trade will be large only when domestic exchange ratios are very high as compared to the international exchange ratios of goods. But, for a large and economically well-advanced country, when it dominates the world market as well its domestic exchange ratios at the most will only slightly differ from the world exchange ratio, then, there is hardly any differ nail gains realist for foreign trade by such a county on the other hand the small country has a limited domestic output and when it enters into foreign trade its import will be of trade will tend to be in favour of the small country. Again, its domestic exchanges ratio wills bemuse higher than the world market price of goods traded. Hence, when it specializes in certain goods on the basis of comparative cost advantage and imports rest of the goods at a much lower price from other countries (then what it would have cost if produced domestically) it certainly reaps a larger gain by entering into the foreign trade.
When trade occurs between these two countries let us assume that international terms of trade is equal to the domestic terms of trade of the large country (i) apparently, no benefit is reaped by the country through foreign trade as there is no difference between the world market price and the domestic price of goods prevailing into eh country. In case fo the small country (ii) when it trades along TD terms of trade (TD/AB) it will completely specialize in the production of X and produce upto point D. it exports X and imports Y from country. It thus reaches a new equalilibrium position under foreign trade at point R and thereby attains a higher community indifference cure (CIC’) indicating a higher level of satisfaction eventually SD is the export of X by the country I which is the import of X = GP by county II. Similarly country II exports Y = HG to country I which is equal to the latter’s import measured as RS. It appears that the large country has to modify its production pattern at point H just to have a trade relation with the small country. The model depicts that the large country reaps no gains from the foreign trade, while the small country enjoys all benefits. This is just a theoretical extreme case based on the following constraints: (i) there is constant returns to scale so, constant costs conditions, and (ii) the resulting demand pattern modifies the terms of trade for the small country only while the market and domestic terms of trade increasing cost condition and different demand pattern exist the international terms of trade will e set between the domestic exchange ratios fo two countries benefits accruing to each country depending on how much the internaitol terms changes are more pronounced in the small country and that therefore most of the gains accrue to its residents.
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