Page 23 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 2 : Measurement of Gains from Trade

From situation (i) it is revealed that 10 units of wheat in India is equal to 7.5 units of cotton and in Notes
Pakistan it is equal to 10 units of cotton i.e.
10 W = 7.5 C or 10 W = 10 C
So the net result is:
+ 7.5 C – 5 C
or 10 C – 5 C
i.e. + 2.5 C or + 5 Cotton
Thus, specialization results in net gain of 2.5 or 5 units of cotton which is distributed between the two
countries.
The gain that a country enjoys by pursuing trade according to this theory is illustrated by the following
Figure 2.2.
In Figure 2.2 X-commodity is shown on
OX-axis and Y-commodity on OY-axis. Q PPC
Suppose, in case of trade, AB is the after Trade
production possibility curve that indicates A
different combinations of X-commodity Y 1
and Y-commodity produced by the given Commodity
number of labour. Point ‘E’ on AB curve A F
indicates equilibrium position of the
country. After entering into trade, the E
production possibility curve shifts and
assumes the shape of BC curve. Slope of PPC
BC cirve indicates international price before Trade
ration of the country. Suppose this
country is in equilibrium at point ‘F’ on
ABI curve. If this country produces a
combination of X-commodity and Y- O B B
commodity as shown by point ‘F’, it will X 1
have to increase the number of labourers Commodity
to such an extent that domestic production Figure 2.2: Gains from Trade
possibility curve shifts from AB to A B .
1 1
Thus the amount of gain from the trade will be measured by BB /OB.
1
Criticism
The main points of criticism of gain from international trade occurred as a result of comparative cost
or Richardo’s teory are as under:
1. According to later economists, Ricardo has unnecessarily exaggerated the gain from international
trade. Ricardo’s theory does not apply to those countries which cannot produce the imported
goods or can produce the same only at higher cost.
2. Mill feels that Ricardo’s theory does explain the reason why international trade takes place but it
does not explain the quantum of gain and how the same is distributed among different countries.
Mill’s Approach

J.S. Mill analyzed the gain as well as the distribution of the gain from international trade in terms of
his theory of reciprocal demand. According to Mill, it is the reciprocal demand that determines terms
of trade which, in turn, determines the distribution of gains from trade of each country. The term
‘terms of trade’ refers to the batter terms of trade between the two countries, i.e., the ration of the
quantity of imports for a given quantity of exports of a country.

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