Foreign trade enlarges the market for a country’s output. Exports may lead to increase in national output and may become an engine of growth. Expansion of a country’s foreign trade may energise an otherwise stagnant economy and may lead it onto the path of economic growth and prosperity.
Due to Increased foreign demand may lead to large production and economies of scale with lower unit costs. Increased exports may also lead to greater utilisation of existing capacities and thus reduce costs, which may lead to a further increase in exports.
Expanding exports may provide the great employment opportunities. The possibilities of increasing exports may also reveal the underlying investment in a particular country and thus assist in its economic growth.
The foreign trade contributes to economic growth are as follows:
- Foreign trade generates pressure for dynamic change through
(a) Competitive pressure from imports
(b) Pressure of competing export markets
(c) A better allocation of resources;
- The primary function of foreign trade is to explore means of procuring imports of capital goods, without which no process of development can start;
- Trade provides for flow of technology, which allows for increases in productivity, and also result in short-term multiplier effect;
- Foreign trade increases most workers’ welfare. It does so at least in four ways:
(a) Larger exports translate into higher wages
- Factor endowments:
Most of today’s developing countries are much less endowed with natural resources (except for petroleum- exporting countries) than were the western countries during the 19th century.
- Population growth:
Most of today’s developing countries are overpopulated. This means that the major portion of any increase in their output of food and raw materials is absorbed domestically, leaving, very little, if any, export surplus.
- Factor mobility:
There is much less flow of capital in developing countries today than was observed in the 19th century. At the same time there is outflow of skilled labour from such countries on a fairly large scale.
- Neglect of agriculture:
Finally, until recently, developing nations have somewhat neglected their agriculture in favour of more rapid industrialisation. This has hampered their export growth in particular and development prospects in general.
(b) Because workers are also consumers, trade brings them immediate gains through products of imports
(c) It enables workers to become more productive as the goods they produce increase in value
(d) Trade increases technology transfers from industrial to developing countries resulting in demand for more skilled labour in the recipient countries.
- Exports allow fuller utilisation of capacity resulting in achievement of economies of scale, separates production pattern from domestic demand, increases familiarity with absorption of new technologies;
- Increased openness to trade has been strongly associated with reduction in poverty in most developing countries. As the historian Arnold Toynbee said ‘civilisation’ has been spread though ‘mimesis’, i.e. emulation or simply copying.
In short, trade promotes growth enhancing economic welfare by stimulating more efficient utilisation of factor endowments of different regions and by enabling people to obtain goods from efficient sources of supply.