Page 1 : GAINS FROM, A. | INTERNATIONAL, , TRADE, , , , , , , , 41 Introduction, , 4X Reciprocal Demand, , 43 Offer Curves, , 4.4 Gains from Trade, , 4.5 Increase in Production, 4.6 Increase in Consumption, 4.7 Higher Economic Welfare, 4.8 Dynamic Gains, , 4.9 Factors Determining Gains From Trade, , ———— est, , 4.1 INTRODUCTION, , , , International trade is based on differe, , : gee Nces in pric,, Services in different countries. PRS, , S Of goods and, , Price differences reflect the differences in cost of Prod, Oductio, n., , Cost differences are due to differences in factor Price., Ss., , Each country differs in natur, labour, technology and in oth, of goods and services., , al resources, quantity a ,, €rinputs which go into the Secatity of, “uction

Page 2 : tional Trade, in the production of those, at a lower cost of, , stic demand) and, , rma, , rdingly each country spec ialises, “tT services Which it can produce, them (after meeting, the domes, available at a lower price, , , , js anc, , suction, exports, , pr pts the goods and services w hich are, impor :, , ther countries, , resent is autarkic (with no internati, , s in the world are open, interdepenc, , onal economic, jent, , No economy aty, ys), therefore countrie:, xy enjoy the benefits arising out of, form, , , , thus enter into trade therel, «ternational trade, Gains from international trade are in the, , if production, cheaper goods and services, increase in, higher level of welfare and many other related, , of increase mn, , consumption,, ydvantages including socio-political., advantag' ‘, , , , Ad RECIPROCAL DEMAND, , heory of international trade is based on cost of production, abour. The exchange ratio (terms of trade) both internal, onal is determined by the cost of production as, , Ricardian t!, ell-known example of England and Portugal, , interms of |, and internati, explained in his w, , roducing cloth and wine. The demand aspect was not considered, , File determining the terms of trade., John Stuart Mill an English classical economist (1806-1873) brought, 4n the demand factor in explaining terms of trade. Reciprocal demand, is the mutual demand for each others goods of trading partners. It, is the strength and elasticity of one country's demand for an other, country's commodity in exchange for its own goods at different price, , ratios of exports and imports (terms of trade)., Mill's theory of reciprocal demand is explained on the basis of the, , following assumptions., Assumptions :, 1. Two countries, , 2. Two commodities, 3. Production is subject to constant returns to scale

Page 3 : Business Economics - VI (T.y. B.Com, '§, , F yort cost 2, 4. No trans} ent, kets operate under perfect comp:, 5. Markets, ; i yment, Existence of full employme, , W 2C ies, 7. Free trade between the countr:, , ive ifference, 8. Trade is based on comparative cost d, 8. rade is bas, i example of Inq;, Based on the above assumption let us take the p ndia :, asec, China trading in rice and cloth. an,, , Table 4.1 explains production and cost in India and China,, , Table 4.1 : Production by a Given Labour Days, in Both the Countries, , , , , , , , , , , , , , , , , , , , Food Cloth Domestic Exchange Ratio, India 18 12 1: 0.66, China 20 20 eee, The domestic cost ratio in India is 1: 0.66 and in China1: 1 which is, based on Production by a given labour, China has an absolute, advantage in the Production of both the commodities. China's, advantage in the Production of f, , od is 20 : 1g 1, , 0: ;, 0:12 (10: 6). Chi (10 : 9) and in, , Production 10 /6, Production food, , A “he internal exc :, 'S Biven in the a Ve table. In India hange ratio for, , y enter into the trad : itis 1:0.66 and in, , i ith; a, e, t ;, , ratio will be within the limits of interna] exchange oa a, er, , , atio, be beneficia] to both, the count;, iat of One unit of food and OR8 as India —, Y giving lesg than o ina obtains 1 unit of

Page 4 : M >» dee, Vy 13, , rnational Trade, cal demand,, , al terms of trade however, de, , the strength and elasticity of each country 5 demand for, , "If India's demand for ¢ loth is intense, then, , it receives n 0.66 P, , , , Gai ., pends on ree ipro, , phe act!, , that, country's produc t, trade with China, as long as more tha, similarly, China will trade with India if it, of cloth. The exact, , The country, , other, India W ill, sth for one unit of food. §, food by giving less than one unit, demand, , cle, gets one unit of, , , , exchange ratio depends on the reciproc al, Ng whose demand is intense for another « country's product, would trade, , ata ratio closer to its internal exchange ratio., , ES — ——, , LS. Mill's concept of reciprocal demand was presented by Alfred, , Marshall and Francis Edgeworth through offer curves., , An offer curve is a graphical representation of reciprocal demand, , g to offer, , indicating various quantities of exports a country is goin, , for various quantities of import as a succession of possible terms of, , trade., The Offer Curve differs from the ordinary demand and supply, , curves because, , 4. Theordinary demand curve, expressing various quantities of a, commodity demanded at different prices, normally slopes, downwards from left to right. The ordinary supply curve,, , us quantities of commodities supplied at, , different prices, slopes upwards from left to right. The offer, curve on the other hand can be viewed either as a demand for, one commodity in terms of the other or as the supply of one, , commodity in return for the other., , expressing the vario, , , , , , , , , , , 2. The normal demand curve explains the relationship between, price and quantity, whereas the offer curve uses a concept, known as ‘Representative Bale’. According to Marshall a typical, 'bale’ signifies a constant amount of a country's exportables., The idea of representative bale was evolved by Marshall, because in international trade countries deal ina large nu mber, of commodities whose nature and composition change rapidly.

Page 5 : ernie vicl, Reon, , ™, jia's offer curve OF ang Ry Ey 1, fri as, , efains the domestic rate of, e*F 4 gains from trade, ie ar, , e<, st, mon, A int, /, , wm, fr, a, Ih" ne, } I, , , , N, v India (X), Fig. 4.1, , In Fig, 4.1 the terms of trade are ee 2 i INEETSEction, the offer curve of India (Ol) and Russia ( ) a point E. OB and Qa, are the domestic price ratios of the two countries which Show the, exchange rate at home between the two commodities. In, , ate : dia offer,, ON of X and gets NE of Y from Russia i.e. Russia offers NE of y, against India’s ON of X., , India within its economy has the exchan, where for ON of X it, , India’s gain is LE. Russia gets ON of X, From India, howeve, , less of Y. Russia say