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Let us now learn from the subject experts of gains from trade homework answers about the definition of gains from trade and the concepts related to the topic.
What is need of nations to participate in the process of trading?
Nations participate in the process of exchanging goods with one another (which is known as the process of trading) with the motive of earning a profit. This is known as gains from trade. The reason why countries trade is because they have different resources, different technology and different labor and countries differ in efficiency while producing goods.
It is possible to achieve gain from trading when opportunity costs of producing goods are different in different countries. Trading between two nations results in increase of output because switching from one task to another is prevented. It also leads to enhancement of the levels of skills because the same task is being performed again and again. This in turns results in betterment of the productivity curve.
Factors affecting gains from trade:
Let us learn about the factors affecting gains from trade from the experts of gains from trade homework answers.
- Difference in cost ratio:
Gain from trade earned by the countries depends on the difference in the cost ratios. If the difference between the exchange rate and the cost of production is small, it will lead to a smaller gain, and vice-versa.
- Demand and supply:
Elastic demand and supply in a country result in more gain than inelastic demand and supply.
- Availability of the factors of production:
If the factors of production like raw materials, technology, skills, and labor are present in a country, and it specializes in a particular production, it will lead to a higher domestic cost ratio, and hence the gain from trade will be higher.
- Size of the country:
The size of the country matters when gains from trade are concerned. If the size of the country is small, it is easy to specialize in production of a specific commodity and earn gains from it by exporting it to a larger country.
But if the country is large in size, it needs to specialize in the production of more than one product because one specialized good will not create much demand in the small sized country. So, we can see that a small sized country has a greater advantage.
- Trade terms:
Closeness between the cost ratio and the terms of trade will result in earning more gains from trade.
- Efficiency of the process of production:
When there is an increase in the efficiency of production, it results in lower cost of production, and hence the prices of the goods get reduced. An import in such a case will result in earning gains from trade.
Gains from trade types
There are two types of gains from trade. It can be static or dynamic.
Static gains results in gain of social welfare due to proper utilization of the resources. Countries utilize the theory of operation of comparative cost and hence are able to increase their national output, which in turn results in increasing the level of social welfare.
Dynamic gains results in economic growth of the country. The country specializes in the production of a particular commodity, which results in a large volume of quality production. Extension from domestic market to international market will help in accelerating the economic growth of a country.
The benefit of specializationÂ Â Â Â Â Â
Let us understand about benefit of specialization from the subject experts of gains from trade homework answers.
Let us draw a contrast between U.S. and Canada on the strawberry producing capacity. Let us consider that U.S. produces more strawberries than Canada. So, it is obvious that U.S. will have an upper edge and gain absolute advantage in the department of strawberry production. But only having an absolute advantage does not ensure that it will give a comparative advantage. In order to achieve specialization in any production, the factor of opportunity costs needs to be considered.
Let us understand this better by assigning numerical values. Let us consider that U.S. produces 80 apples or 20 strawberries. The opportunity cost of producing one strawberry in U.S. is 80/20, which is equivalent to producing 4 apples. On the other hand, Canada is producing 5 apples or 15 strawberries, so, here the opportunity cost of producing 1 strawberry is 5/15, which is equivalent to producing one-third of an apple.
If U.S decides to specialize in the production of strawberries, it will have to give up on the production of 4 times of those many apples, while on the other hand, Canada decides to specialize in the production of strawberries, it will only have to give up on the production of one-third of an apple. If the opportunity is considered, Canada has an advantage over strawberry production even though U.S. produces more strawberries than Canada.
From this example, we found out that even though U.S. had a higher production and hence an absolute advantage, but when opportunity costs were considered, Canada got the advantage over the strawberry production.
The subject experts of gains from trade homework answers will present you with more such kind of examples so that you concepts become crystal clear.
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