Page 38 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes the production gains are shown, note carefully that while there has been gain in terms of World GNP
increase, this had come about entirely through production gain in Malaysia, i.e. there has been no
production gain in or for India.
World GNP has gone up from 180 to 200 after the introduction of trade. This is entirely due to
production gains resulting from specialization in Malaysia, after trade. There are no production gains
to be derived from specialization as far as India is concerned, because India’s level of production or
GNP is the same (viz. 120 units) both before and after trade. This suggests that small countries tend to
benefit more than the large countries from the standpoint of specialization in production resulting
from the establishment of international trade. As far as large countries are concerned—India, in this
case—they can attain production specialization even without the help of international trade due,
mainly, to the large size of their domestic markets. Small countries, on the other hand, need foreign
markets in order to achieve specialization in production. Viewed in this light, small countries stand
to gain more from trade and specialization than the large countries.
Table 8 : Production Levels after International Trade
Commodities World

Countries Textiles Rubber Production
(units) (units) or GNP (units)

India 120 0 120
Malaysia 0 80 80

World 120 80 200
Unless both countries stand to gain from trade, there can be no trade between them. Production gains
have gone to only Malaysia, and India has no production or GNP gains from trade. This means that
India, as well as Malaysia, must have some consumption gains in order that there is mutually beneficial
trade between the two countries. The consumption gains for the two countries depend upon how the
production gain is shared or distributed between the two countries. In other words, how much (or
how little) each country gains from trade, in terms of consumption or welfare, depends entirely on
the terms of trade. The role of terms of trade in distributing trading gains can hardly be overstayed.
Let us inspect some possibilities below :
1. If the international terms of trade between India and Malaysia are, say, 3:4 (i.e. 3 units of textiles
have to be exported in order to import 4 units of rubber, or vice versa) then both the countries
will share the benefits equally. This is because these international terms of trade (viz. 3:4) lie
exactly between the two internal opportunity cost ratios of India and Malaysia. The consumption
gains resulting from such International terms of trade for the two countries are shown in
Table 9 below :
Table 9 : Consumption Levels After International Trade
Commodities Total Gains in
Countries Textiles Rubber Consumption Consumption
(units) (units) (units) (units)

India 90 40 130 10
Malaysia 30 40 70 10

World 120 80 200 20

India, after trade produces 120 units of textiles; she consumes 90 units of it by herself and
exports the remaining 30 units to Malaysia. By exporting 30 units of textiles, India receives 40
units of rubber as imports from Malaysia at the terms of trade of 3:4. This means, when the

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