The increased interaction of countries all over the world through international trade in goods and services has left lasting effects on both developed and developing nations. Globalization, as this emerging international integration of political economies is popularly termed, carries with it numerous benefits and opportunities as well as corresponding costs and risks. In general, the opening up of economies to global trade brings with it either developmental or anti-developmental influences. Identifying the effects of international trade on a country’s development requires the inspection of four important economic concepts, namely, efficiency, growth, equity, and stability which can be best studied under the neoclassical theory of international trade.

           First, efficiency in the economy ensuing from the global exchange emerges from the acknowledgement of variable factor proportions and differing factor endowments that leads nations to specialize and trade instead of moving into isolation. An improvement to the comparative advantage model, the neoclassical theory suggests that countries adhere to specialization of products that use their abundant resources intensively and consequently import products instead that would originally require the use of (their) scarce resources. This very much gives way to economies of scale within countries and among regions. Although complete specialization could not occur due to the domestic price pressures, it is certain nations not only gain more from trading but likewise their participation in the exchange contributes to the increase of world output.

           Secondly, by enlarging nations’ consumption capacities (via factor endowment specialization) and progressively providing better access to scarce resources within the auspices of an expanding world market, trade is assumed to stimulate economic growth. These conditions are especially necessary for the growth of poor countries whose production possibility frontiers are almost always hampered by the scarcity of resources and the inability to secure capital. Not only are nations able to benefit from the exchange of consumption goods and services, the ability to obtain expensive materials, products, technologies, and even ideas with the added benefit of market signals from international clients allow for self-sustained growth in the developing countries.

           A repercussion to this economic growth is the issue of equity and distribution. According to the factor endowment theory, the domestic specialization based on the abundance of resource would mean higher shares of national income going to labor for the developing countries. Hypothetically (as contradictions have been widely observed in real world scenarios) international real wage rates and capital costs are predicted to equalize. Through the equalizing of factor prices within and among economies, alongside the appraisal of real incomes and more efficient utilization of resources, trade encourages greater equality domestically and internationally. Also, developing nations benefit the most from the emerging global culture that allows them to catch up via the diffusion of productive ideas that have been fundamental to the frontier growth of the developed world.

            Lastly, the stability impact on a country’s development denotes the self-sustaining growth accruing from international trade. Increased domestic production capacities brought about by the accessibility of (relatively less endowed) capital enables countries to attract investments and spur industrial growth. Both domestic and international stability is attained by the maintenance of the efficiency of participating economies and of the system that directs the global market.  

            However, the limitation of the neoclassical model is attributed to its assumptions of fixed quantities and constant qualities of productive resources and technologies, the mobility of factors, the presence of a non-interventionist government, the flexibility of international prices, and the accruing of benefits to nationals. The criticisms would point out flaws in the prediction of the effects of trade on the country’s development. Nevertheless, the weaknesses of the model do not necessarily non-operationalize the theory but serve to point out that, in real world affairs, the effects of efficiency, growth, equity, and stability do not happen to all nations participating in international trade. 

Source:

Todaro and Smith, 11th ed.