Gains from trade

When gains from trade those advantages are referred to in the trade theory, arising from international trade. In this case, these benefits to the entire world economy, individual nations or economies or individual populations can refer to.

Gains from trade can be realized whenever

• Different countries differ in the availability of certain factors of production or use different production
• Result from expansion of the market economies of scale
• Be available through technology transfer new or better technologies.

The term foreign trade income comes from the real international economic theory. It must be clearly distinguished from the trade surplus, which is the excess of exports over imports, a term used in the trade balance.

Causes of foreign trade gains

There are, in trade theory, various specific models to explain why countries trade with each other and how that gains from trade arise from it. However, the theoretical model of an economy is considered without foreign trade ( autarky ) for a deep understanding first, before moving on to specific theories.

The considered theoretical models use the following simplifying assumptions:

• Are examined only two countries.
• There are only two goods produced ( and consumed ).
• There are no transport costs for the transfer of goods between countries.
• There is perfect competition in both countries.
• The prices of the two goods are given as relative prices, ie there is no money and therefore no exchange rates.

Self-sufficiency

A self-sufficient economy that is not found in reality in perfection, is used as a benchmark to illustrate the advantages of foreign trade. Such a country does not engage in foreign trade, that is, it can only consume what it produces and it only produces what it consumes. Such a country has specific consumption possibilities and thus a fixed Produktionsmöglichkeitsskurve. It can only have the amount of goods that are located below or to the left or right on the transformation curve. For simplicity, one often considers only one factor of production and that the total labor supply L (English Labour ) and given labor productivity aL ( see Figure 1). Gains from trade can not be realized consequently in a self-sufficient economy.

Gains from trade

Just by the fact that foreign trade is operated, there is a consumption possibility extension. With unchanged production levels that acts a country with the products in which it has relative advantages in production. Since these products are by nature products in which the other country has disadvantages relative production, in turn, is the other country in which it has against these products themselves comparative advantages. This results in a new relative price ratio on the world market, which is more favorable for the country with respective comparative disadvantage than the cost of production ( ie the opportunity costs) in their own country. The consumption possibilities of both countries increase. In short, simply by an international redistribution of existing goods, that is, without changing the structure of production, there is an increase in welfare.

Gains from specialization

This trading profit effect is to specify the products in which they have a relative productivity advantage is reinforced or enhanced by international division of labor in the form of specialization of the individual economies. Specialization means the redistribution of production labor, that is, if a country produces only the products with the comparatively lower opportunity costs. This is equivalent to a shift of production towards the relatively expensive in free trade good which then is an export commodity (see resource allocation ). Example: Country A specializes due to its comparative advantage over country B i to Good. For this country A can now obtain a higher price on the world market, while at the lower opportunity cost of production as country B. At the same country B pays on the world market a lower price for goods i, as it would have in -house production at opportunity costs. There will be a insgesamten expansion of world production, which is more pronounced than for pure exchange ( trading profits ). One speaks of specialization gains. It should be noted at this point that the above considerations are under the premise of complete specialization, that is, both countries produce only one good. In the event that the aggregate demand for a commodity exceeds the production possibilities of specializing in this good country, the other country is forced to produce both goods. This country needs besides the good to which it is specialized, so also produce the other good, it is incomplete specialization ago. Here, the free-trade price ratio is identical to the autarky price ratio, resulting in the country that produces both goods. In this case it comes in this country, although a change in the production structure, but no resulting gains from trade.

Specialization due to productivity differentials in Ricardo Model

The Ricardian model leads gains from trade alone back to productivity differences in individual economies. Important factors here are not the absolute production advantages, including a country, but the comparative advantage.

Countries specialize in the production of goods that they can produce relatively cheaper than the other country in autarky. Absolute production disadvantages, such as backward production technology or a total (absolute) lower productivity, this statement does not affect. The favorability of foreign trade depends solely on the difference in the relative price relationships between home and abroad. In other words, can be combined with foreign trade a maximum quantitative supply of goods and national economies of all nations as a whole achieved if each country specializes in the production of goods in which it has comparative advantage. These goods can be exchanged internationally for goods that can be produced only with comparative disadvantages in domestic production.

To illustrate that this specialization of the national economy gains from trade can arise, a declaration of " indirect production " of one country for the other country offers itself. The indirect production can be construed that a country relates produced by the other estates, instead of creating it yourself. Suppose we consider two economies: country A and country B, which can be two different goods, good i and good j produce. Furthermore, both countries can trade with each other. Country A could produce good j directly, but it is assumed if country A has a comparative advantage of good i, it will specialize it. Trade with Country B Country A allows the good j to "produce" thus from country B relatively cheaper to purchase. This indirect " production " is more efficient than direct.

Example: Prerequisite is a relative price of good i, which should be at international balance at 1. If good i is traded at the same price as good j, both countries will be specialized. In this example, the labor coefficient of good i should be in country A at 1 hour per unit and in country B at 6 hours per unit. Analog for good j in country A are at 2 hours per unit and in country B at 3 hours per unit. In country A, the production of a unit of commodity i requires only half as many hours as the production of one unit of good j. Workers in country A can earn more and Country A will specialize i on Good so by producing a unit of commodity i. Conversely requires in country B, the production of a unit of commodity i twice as many hours as the production of a unit of good j, so workers can earn more and country B will specialize j on Good in country B through the material j. Country A can good j efficiently "produce" by establishing good i and j exchanged for goods instead of producing good j itself. If country A Good j produce, it produces only half a unit per hour. This hour could Country A use by an entire unit of good i to produce and exchange them for a whole unit of commodity j (remember that the price ratio is 1:1). Country A wins in this trade. Accordingly, country B could produce in an hour 1/6 unit of commodity i. However, it is better that hour for the production of good j to apply (1/3 unit per hour), which can then be redeemed against i 1/3 unit of the good. Both countries can use their work twice as efficient as they relate the necessary goods by mutual trade. In-house production would be less efficient.

So gains from trade arising from differences in the availability of certain production factors or different production methods applied in the countries.

Specialization due to different factor endowments in the Heckscher -Ohlin model

In the Heckscher -Ohlin model, the different relative factor endowments and resource distribution and the relative factor intensity of each nation is regarded as the cause of foreign trade and therefore gains from trade. That is the decisive factor is the presence of various factors of production and its corresponding use. Relative differences in productivity (technological conditions, labor coefficients, ...) are irrelevant.

In the Heckscher -Ohlin model, only two countries are considered with two factors of production: labor and land. A comparative production advantage for a country results from the relatively more intensive use of the relatively more possibility of existing production factor. This means that a country has because of its relatively higher labor or soil solution over another, and thus production cost advantages in certain goods. We call these goods then as a down - and labor-intensive. On the respective factor markets, prices are formed by supply and demand for labor and land. The inclusion of foreign trade it is to specialize in just the estate, in which the degree of utilization of the abundantly available factor is relatively higher. These ground-based or labor-intensive products are with another country, in which the ratio between factor distribution and use intensity is just flipped, traded.

Example: Country A has a relatively higher labor supply than country B. Hence, country B has a relatively abundant supply of ground. Work is therefore in country A relatively cheaper than in country B, and the ground is relatively cheaper than in country A. Therefore, country A should specialize in the production of labor-intensive goods and country B on the production floor- intensive goods in country B.

Thus, it comes in only two countries with a national shift in demand: the demand for the relatively more existing factor, and decreases after the relatively scarce.

• Example: Due to the specialization of country A to the labor-intensive good rises in country A, the demand for labor. In country B rises by specializing in the soil- intensive goods, the demand for land. According to the demand increase the price of the factors will increase.

An increase in the price of the ground-based or labor-intensive good draws a simultaneous wage - interest ratio change within the individual countries themselves. This redistribution of income means that there will be winners and losers:

• Example: With a rise in the relative price of the labor-intensive good i leads to a relative increase in wages for the workers, while cutting interest rates ( as interest while rental and lease income, proceeds from sale of raw materials, etc. combined ) for the landowners. The ratio w / r increases.

• Graphics to illustrate the Heckscher -Ohlin model

Figure 5: SS curve shows the relative relationship between relative factor prices and relative goods price

Figure 6: Combining the previous two graphs, one can clarify the relationship between commodity prices and the ground - labor input ratio.

In theory, however, could be a compensation of " losers." This is done in an international harmonization of factor price ratios (see Faktorpreisausgleichstheorem ).

Without foreign trade would have an economy to provide complete self. The consumption point of land would then be on the production possibilities curve (see Figure 7 item 1 or 2 ). Point 1 corresponds to the optimal production and consumption amount for a given budget.

Now, if foreign trade is operated, an economy can consume both goods more. The relation is again determined by the budget line of the country. The slope of this line corresponds exactly to the negative relative price ratio of good i to good j ( = -Pi/Pj ). The blue area in the graph shows the possible expansion of consumption starting from point 2 dar. It could now every one point higher or lower on the consumption possibility frontier are consumed. As a result, it is theoretically possible that all economic agents in an economy can consume more. Thus, the foreign trade a potential source of profit for all dar.

Other causes of gains from trade

Besides the two above-mentioned theories of Ricardo and Heckscher- Ohlin there are other causes of gains from trade, but have a rather secondary importance. Three are listed here as examples:

Economies of scale

Economies of scale through expansion of the market can also lead to gains from trade. Here, in particular the inter-industry trade and intra-industry trade.

In intraindustriellem trade Industriegüterder the same group of products are exported to the two partner countries each or imported. The specific advantage of intra-industry trade is in a greater benefit by additional and higher quality input on the domestic market for consumers and producers. The consumer opens up a greater range of different products on the market, in addition to fall by increasing returns to scale prices. Interindustry trade, however, refers to the exchange of manufactured goods of different product groups. Trade with the different types of products takes place either in the form of export or import in the partner countries or within a country between the individual branches of industry.

Technology Transfer

Furthermore, foreign economic activity brings so-called technology spillovers with it, that is different to less technologically developed countries benefit from higher technicized country expertise. Part of this principle is to break with known goods and technologies in the world market. This is particularly the case with cars and electronic products. Without integration into the global trade in goods would be this " reverse engineering" ( " Reverse engineering " / reconstruction ) is not possible.

Example: India's agriculture, and thus the Indian population, benefited from the techniques of management fields in Germany. Another example would be the expensive water treatment of industrial countries in the developing world, especially in arid areas with a relatively high population density.

The welfare gains earned from foreign trade can in turn lead to better facilities of research & development sector, which contributes to further development of production techniques and thus an increase in productivity.

Summary

Two elementary foreign trade theories - the Ricardian model and the Heckscher -Ohlin model - offer explanations for the benefits that can be drawn from international trade. In the Ricardian model, both countries gain due to relative productivity advantages of foreign trade. So it is a win- win situation. In the Heckscher -Ohlin model, however, be winners and losers from trade arise.

In response to this fact, some countries take in the reality of protectionist measures such as the imposition of duties. Such protectionism helps the one factor that is used relatively abundant in the protected sector. Conversely, this policy hurts the other factor. All in all, however, outweigh the gains obviously the losses, otherwise the economies would not run a foreign trade. Gains from trade are reflected in a consumption growth opportunity, increase in utility or welfare growth. With free trade, the potential gains from trade can be fully maximized. In the two models discussed gains from trade are defined as trading profits and gains from specialization. The modeled gains from trade are based on a relative price ratio, which may change over time. The terms of trade measure the change in the relative price levels between export goods and import goods in the long-term perspective.