Beneficial Effects of International Trade | Economic Development

The following points highlight the ten beneficial effects of International Trade in Economic Development. 

Beneficial Effect # 1. Benefits for International Specialisation:

International trade enables a country to enjoy the advantages of international specialisation according to comparative costs.

Every country specialises and exports those commodities which it can produce cheaper in exchange for what others can provide at a lower cost.

When a country specialises according to its comparative advantage, it gains an increase in real income and consequent rise in the standard of living of its people J.S. Mill emphasised this aspect of international trade and maintained that trade according to comparative advantage, results in a ‘more efficient employment of productive forces of the world’ and this may be considered as the ‘direct economical advantage of foreign trade’.

Therefore, international trade by enabling better and more efficient utilisation of the resources of a country increases its real national income and hence has a growth-promoting effect.

Beneficial Effect # 2. Widening of Market and Raising Productivity:

It is argued that the productivity gains arising out of extension of market is a consequence of foreign trade. Improvements in productivity result from greater division of labour, a higher degree of mechanisation and greater possibility of innovation.

It is said that foreign trade, by widening the extent of the market and the scope of the division of labour, permits a greater use of machinery, stimulates innovations, overcomes technical indivisibilities, raises the productivity of labour, and generally enables the trading country to enjoy increasing returns and economic development. J. S. Mill has categorised them as indirect dynamic benefits arising out of foreign trade.

Thus foreign trade, by extending the size of the market, exercises a dynamic influence on the economy. In turn, it helps to raise the production at higher trade. As a result, country enjoys the benefits of external and internal economies of scale.

Beneficial Effect # 3. Helpful for High Growth Potential:

Foreign trade can also help in the development of a country enabling it to exchange domestic goods saving low growth potential for foreign goods with high growth potential.

Prof. J.R. Hicks emphasising this growth promoting aspect of international trade observes that trade offers an opportunity for the exchange of goods with less growth potential for goods with more growth potential, thereby quickening the progress that results from a given effort on the saving sides.

It provides an opportunity for importing capital goods and materials required for development purposes. The import of machinery, transport equipment, vehicles, power generation equipment, road building machinery, medicines, chemicals and other goods with high growth potential provides greater benefits to the developing countries.

Beneficial Effect # 4. Educative Effect of Trade:

It is maintained that international trade can serve as a vehicle for the dissemination of technological knowledge. A deficiency of knowledge can be a biggest handicap in the development of a country and this deficiency can be effectively removed through contact with more advanced economies i.e. by making possible through foreign trade.

The technical know-how and skills is an indispensable source of technological progress, and the importation of ideas in general is a potent stimulus to development.

According to J. S. Mill, trade benefits the less developed country through ‘the introduction of foreign arts, which raise the returns derivable from additional capital to a rate corresponding to the low strength of the desire of accumulation’. Thus, foreign trade can have an educative influence on the people of developing countries and can thus help in bringing about technological and industrial revolution.

Beneficial Effect # 5. Capital Formation:

It is said that foreign trade helps to increase capital formation. The capacity to save increases as real income rises through the more efficient resource allocation associated with international trade. Foreign trade also provides stimulus for investment and thus it tends to raise the rate of capital formation.

This stimulus comes from the possibility of realising increasing returns in wider markets that foreign trade provides. Moreover, by allowing economies of large scale production, the access to foreign markets makes it profitable to adopt more advanced techniques of production.

Thus international trade, by creating conditions for increased capital formation in underdeveloped countries, can help in their economic development.

Beneficial Effect # 6. Basis of Import of Foreign Capital:

International trade also helps in promoting development by creating suitable conditions for the import of foreign capital. Haberler argued that trade is a vehicle for the international movement of capital from the developed to the underdeveloped countries.

The amount of capital that an underdeveloped country can obtain from foreign countries depends to a considerable extent on the volume of its trade. The larger the volume of trade of a country, the greater will be the volume of foreign capital that can be expected to become available to it.

It is an established fact that it is much easier to get foreign capital for export industries because they have a built-in solution of the transfer problem.

Beneficial Effect # 7. Healthy Competition:

Foreign trade also helps in economic development by providing healthy competition and keeping in check inefficient monopolies. The more competitive an economy is, the more efficient it will be.

According to J.S. Mill, “The foreign trade benefits an underdeveloped country indirectly by encouraging healthy competition and checking inefficient monopolies. Healthy, competition is essential for the development of the export sector of such economies and for checking inefficient exploitative monopolies that are usually established on the grounds of infant industry protection.”

Similarly Prof. Hicks opines, “Foreign trade accelerates the rate of economic development of underdeveloped countries.

They get opportunities for improved techniques. There is expansion in the size of market. Domestic and foreign goods are easily available. Income, output and employment of the country increases. The countries such as Singapore, Arab countries, Brazil, Malaya, Japan, Korea, Taiwan, Hongkong, etc. get tremendous progress due to international trade.

Beneficial Effect # 8. Foreign Trade helps in Breaking Vicious Circle of Poverty:

The underdeveloped countries are characterized by the existence of vicious circle of poverty. It implies, low income, deficiency of demand and lack of demand accounts for low supply which in turn accounts for low income. But, international trade enables underdeveloped countries to produce more of those goods in which they enjoy greater comparative advantage.

Consequently, production, income and employment in these countries increase leading to increase in demand. This increase demand is partially met by domestic production and partially by foreign imports. In this way, exports and imports of various products help in breaking the vicious circle of poverty.

Thus, it accelerates the rate of economic development automatically in the economy.

Beneficial Effect # 9. Efficient Use of Means of Production:

International trade, it is felt, provides better ground for efficient use of various resources due to its comparative advantages. According to Prof. J.S. Mill it adds to the efficiency of production. In underdeveloped economies, agriculture is backward and subsistence farming is the rule.

With the development of trade, use of latest and improved techniques of production become possible in agriculture as well in industrial sector.

This, in turn helps to increase, the efficiency of means of production. The commercialisation of agriculture becomes possible. Similarly, many new industries come into being and some of them are meant for the production of export goods only. Therefore, efficient use of means of production leads to all-round development of the economy.

Beneficial Effect # 10. Import of Capital Goods & Export of Primary Goods:

Another direct advantages of foreign trade for the economic development of underdeveloped countries is that these countries can industrialize themselves by importing necessary capital goods like machinery, semi-finished products and industrial raw materials from industrialized developed countries.

In return, these countries can export primary goods and mineral resources and thus solve the problem of balance of payments. In this way, import of capital goods and export of primary goods are possible under foreign trade.