The role of foreign trade in economic development is considerable. The classical and neo-classical economists attached so much importance to international trade in a country’s development they regarded it as an engine of growth.
Importance of Foreign Trade
Foreign trade possesses greats importance of LDCs. It provides the urge that develops knowledge and experience, that makes development possible, and the means to accomplish it.
Haberler opines, “My overall conclusion is that the foreign trade has made a tremendous contribution to the developed and underdeveloped countries and that make development in 10th and 20th century and that substation free trade margins, in substation corrections and deviations is that the point of view of economic development.
When a country specializes in a few goods through foreign trade and division of labor, they produce those goods in which the cheaper cost at another whet can produce at a lower cost.
It gains from trade increase the level of output and increases the growth rate of the economy. Increase in the output of poverty and growth development.
An LDC is hampered due to its small markets domestic market which fails to absorb the sufficient volume of output.
International trade has widened the market and increase the inducement to invest the money and saving with more efficient resource allocation.
Myint has applied smiths vent for surplus theory to the LDCs for measuring the effect of gains from trade international the introduction of foreign trade opens up the possibility of a vent for a surplus in a primary producing LDCs.
We can explain it by the diagram
The country producing and consuming OX1, of pricing products and X1E of manufacturing produced ai point inside the production possible curves AB.
Point shifts from E to D on PPC curve AB. Increase of exportable goods from OX1 to OX2 without any sacrifice. International Trade of Term (ToT) line PP’.
The country exchanges ED from EC. The expansion of the market leads to a number of international and external economies and hence to a reduction in the cost of production.
- Foreign trade helps to exchange goods with low growth potential for foreign goods with high growth potential. Then stapled goods, exchanges for machinery capital goods, raw material, and semi-finished products and required for economic development.
- Foreign trade possesses an educative effect on underdeveloped countries. Lack of critical skills, which are a greater hindrance to development than is the scarcity of capital goods. Foreign trade tends to overcome this weakness. Foreign trade helps in accelerating the development of the poor countries by facilitating the selective borrowing of ideas, skills, and know-how from the developed countries and adopting them in accordance with the factor endowments.
- Foreign trade provides the basis for the importation of foreign capital of LDCs. If there is no foreign trade, foreign capital does not flow capital from rich to poor countries.
- Foreign trade benefits in LDC indirectly by fostering healthy competition and checking inefficient monopolies.
Characteristics (Role of Foreign Trade)
In the best policy from the point of view of economic development.
- General Poverty
- Agriculture is the main occupation
- Dualistic economy
- Demographic features
- Unemployment and disguised unemployment
- Development natural resources
- Lack of enterprise
- Insufficient capital
- Economic backwardness
- Technological backwardness
- Foreign trade orientation
- GNP per capita
- Social indication
- Defining “nation” in NI
- Goods and services cannot be measured in money terms
- Measure in of double counting
- Transfer payments
- Illegal activities gambling etc.
- The market value of assets up, down
- Inventory changes (-) (+)
- When deducting capital depreciation from GNP is resulting NNP
- Underestimation of real national income
- Public services cannot be estimated correctly