Advantages and Limitation of International Trade Assignment

Advantages and Limitation of International Trade - Assignment Example This essay explores the issues surrounding international trade. The Theory of Comparative Advantage. If two countries X and Y trade in two goods G and H, both can benefit by specializing in the good in which they have a comparative advantage and then trading them. This has been proved valid even when country X has an absolute advantage in both goods due to the complexities of intra-country distribution of resources. Distribution of Gains and Losses from Trade. If goods G and H use two inputs, K and L (capital/ labor), at given prices, production of goods will probably utilize inputs in different ratios. If G uses a higher ratio of K to L than H, production of that good becomes K-intensive, relative to H. Here, if G is K-intensive, it will mean that H is L-intensive.  If country X’s inputs of production have a higher ratio of K to L than country Y, then X is K-abundant and Y is L-abundant, relatively. A country will tend to export products which are intensive in factors that country has in abundance. A labor-abundant country (say country Y), will tend to export labor-intensive products. Also, country X’s capital-intensive exports will rise. As it does so, the relative price of the abundant factor in that country will rise. The L-abundant country will see labor prices rising, i.e. wages will rise. The purchasing power of owners of labor will rise; purchasing power of owners of capital will fall. International trade will tend to equalize the relative prices of the two factors in the two countries