Question

what is the role of trade in economic development? Give a clear and detailed answer.

Answer 1

For many developing countries, progression from low income to middle and upper middle-income country status rests heavily on successful trade in regional and global markets.

Conventional theory suggests that there is a standard process through which this takes place.

Exporting primary goods (commodities) in which a country has a natural comparative advantage

Import substitution – where a country develops a domestic manufacturing capability and capacity e.g. tomato growing businesses can build tomato processing factories

Export-focussed manufacturing production taking advantage of lower unit cost labour and increasing economies of scale in production

Many sub Saharan African countries and nations such as India and Sri Lanka have a trade ratio lower than the world average. However for others, trade is a significant percentage of national income and competitiveness in international markets has a huge bearing on their overall macroeconomic performance and development prospects.

Successful trade provides for developing/emerging nations:

A source of foreign currency to help a nation’s balance of payments (trade surplus countries build up US$ reserves)

An important way of financing imports of essential imports of capital equipment / technologies and energy supplies

An injection of demand into the circular flow of income and spending + creating positive export multiplier effects

Increased employment in export industries and related industries which can lead to rising per capita incomes and also stronger Human Development Index scores

Falling prices for consumers helps to increase real incomes e.g. by opening up markets to new competition

But overseas trade also has risks

Volatile global prices affecting export revenues and profits

Risks that exports will be affected by geo-political uncertainty and cyclical shifts in demand

Opening up an economy to trade may cause rising structural unemployment in some industries

Answer 2

Successful trade provides for developing/emerging nations:

A source of foreign currency to help a nation’s balance of payments (trade surplus countries build up US$ reserves)
An important way of financing imports of essential imports of capital equipment / technologies and energy supplies
An injection of demand into the circular flow of income and spending + creating positive export multiplier effects
Increased employment in export industries and related industries which can lead to rising per capita incomes and also stronger Human Development Index scores
Falling prices for consumers helps to increase real incomes e.g. by opening up markets to new competition