ECONOMICS

02-08-17 cheapnisha 0 comment

ECONOMICS

Question 2

Gains from trade in the context of Economics refer to the net benefits by the agents from enabling arise in the voluntary trading with other countries. in terms of technical knowledge it is considered to be the increase in consumer surplus added to producer surplus from lowering of tariffs or free trade. Gains from trade are regarded as the benefits are the advantages that any of the countries trading with each other receive well having comparative advantage on producing any good. Apparently, gains from trade can be achieved from both the free trade as well as autarkic trade among the countries. The measure of entire gains from trade is aggregate of the producer surplus and consumer surplus or more precisely the raised output from the specialisation in the production with the resulting trade. It could be eventually illustrated with the help of a diagram:

Figure 1: Gains from trade

ECONOMICS

(Source: Learner)

From the figure the consumer surplus becomes (a + b + d) and producer surplus falls to c therefore, the gains from trade is the triangular area, ‘d’.

It is also considered as the net benefit after eliminating the barriers to trade which are mainly tariffs on imports. David Ricardo foremost introduced the concept of comparative advantage between the countries after the concept of absolute advantage. According to his opinion comparative advantage would only exist when any specific country possess ‘margin of superiority’ in perspective of the supply of its products which implies when the cost of production is significantly low. Countries specialise in the products which they would export since it would cost them low in both capital and labour. Interviews of factor inputs which are abundantly endowed in the countries are being used in producing the export commodities. In wealthy countries, comparative advantage is basically pursue of specialisation in exporting and producing high technology goods with high value as well as high knowledge services. This could be illustrated by an example of the wealthy Nations UK and USA:

ECONOMICS