International Trade: The bed rock of economic development

International Trade: The bedrock of Economic Development

The rate of economic growth and pattern of economic development in developing nations are mostly determined by domestic and international trade that makes a substantial contribution to the economic development of such nations. Traditional trade theories investigate how increase in manufacturing impact international trade. Growth has a significant influence on international trade. There will also be an influence in the opposite way, from trade to growth. Exposure to foreign trade may affect how quickly a country's economy grows and how quickly its manufacturing facilities expand over time.

Impact of Globalization on a country's economic progress

Since the classical and neoclassical periods, the role of international trade in an economy has grown steadily. According to classical and neoclassical theories, globalisation may have a favourable impact on a country's economic progress. There are several sectors/areas that support the international trade directly; one such approach to international trade is the industrial sector, which is essential to the manufacturing as well as agriculture sector for the promotions of goods and services, which is further most important from the international trade point of view. Export promotion may directly help in a country's economic growth by stimulating the manufacturer to produce exportable competitive commodities and allowing the accumulation of foreign exchange with the importance of capital inputs. Furthermore, increased international trade may result in the exchange of knowledge and dissemination of information, which will improve the efficiency of converting input material into final output. This manufacturing process will also help society by utilising multiple agrarian resources and generating employment in the industry, which will raise the demand for goods and services by people as they earn more income, hence boosting economic development. Because of this international trade is defined as the "engine of economic growth" in this scenario.

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There are several conventional approaches for identifying the link between trade and economic growth that have been examined, and the results vary appropriately. Although there are some discrepancies among economists owing to various approaches, some writers believe that international trade has a strong positive association with growth, however other authors believe that there is a negative relationship between trade export driven and economic growth.

International Trade: The bed rock of economic development

Identifying the role of trade and growth

One of the fundamental strategies for identifying the critical role of trade and growth is to evaluate the impact of export promotion, which is an outward-looking strategy for promoting economic growth. In this method, countries begin by expanding the current export structure of certain conventional manufactured goods, but without the intention of diminishing the importance of the core product export structure. By focusing and discriminating on export production, governments believe that the major advantage of export-led trade would not end with static profits but will eventually build dynamic comparative advantages to achieve dynamic gains. The dynamic gain might drive innovation and greater economic growth, particularly manufactured export products, which are actually vital part to economic growth. Sinha and Sinha (1996) analysed a cross-section of trade and the function of balanced trade, that is, exports minus imports, to demonstrate the significance of international commerce on growth and development, and found a positive relationship between economic growth and export trade to imports (X-M) /(GDP).

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Export Promotion and Economic Growth

The GDP growth rates of selected Asian nations from 1951 to 1990 indicate that export promotion is a major contributor to economic growth. According to Bal Assa (1986), the positive impacts of trade, particularly exports, on economic growth would be greater if such a country pursued an outward-looking industrialisation policy. Because such an approach would result in a more efficient use of productive resources. Countries with an inward-oriented industrialization policy would make little effort to promote export growth. Because there is not enough domestic production in such countries or economies to encourage export of domestically produced goods and services, that encourage growth through international trade, and secondly, there is no proper encouragement through funds or resources for producing manufactured products, which acts as a constraint to production.

Similarly, Asafu-Adjaye and Chakraborty (1991) discovered evidence that is constrained by the poor link between exports and real output for inward-looking nations after conducting an empirical investigation. They conducted a super erogeneity test for export and discovered that export was weakly exogenous, which means, an inward-oriented approach was ineffective to development plan when launched early.

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Globalization and International Trade

Globalisation is an important component of the Structural Adjustment Programme (SAP), which aims to open up economies to increase international trade as an engine of growth in developing countries (because it is a policy that encourages the production of locally made goods and services, which will further enhance international trade) by either producing or eliminating protection for domestic industries. Furthermore, the policy is frequently implemented in conjunction with currency devaluation in order to make the devaluation country's exports cheaper in the international market because when a country's goods and services are cheaper and of high quality, it tends to sell more internationally, thereby encouraging growth and development. The ultimate goal is to eliminate export taxes, which will stimulate increased exporting of products and services, which will further support growth and development, as well as import limitations and tariff reductions. Trade liberalisation leads to higher growth rates in poorer countries than in richer countries; further, the removal of trade barriers has increased the flow of trade by a factor of 16 in the last 50 years, with global exports of goods and services nearly tripling in real terms between 1970 and 2000. However, the contribution of developing or third-world nations to global trade remains relatively low since their exports are mostly primary items, which do not add much to such countries' Gross Domestic Product (GDP) as compared to trade in manufactured or completed commodities.

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Outward-looking economies have strong economic growth as a result of liberalised trade. Greenway, Morgan, and Write (2002) discovered a substantial positive association between trade and economic growth in an empirical research of the influence of international commerce on 70 developing nations, i.e., international trade is a cornerstone for economic progress. It has been determined that trades indicate, collectively and in various ways, that an economy will tend to be relatively successful at manufacturing items that are intense in the elements with which the country is relatively well endowed. In other words, comparative advantage states that as nations specialise, they become more effective in providing a product (or, in this case, a service), and so, if they can trade for their other needs, they and the world gain.

Countries with more open trade tend have greater growth rates and per capita income than closed economies. Despite employing the same capital labour input, international trade enhances productivity of firm and total output, demonstrating that economies can boost the economic development by increasing international trade, and return to scale of country. However, there are other opinions about trade and growth; one contends that international trade improves resource allocation in the short run or permanently enhances the growth rate.

Trade Policy and Trade Volume

Trade policy has an impact on trade volume, but there is no reason to believe that the effect of growth will be qualitatively identical to the implications of changes in trade volumes caused by reductions in transportation or rises in global demand. Trade restrictions should be employed as a governmental reaction to genuine or perceived market flaws, not as a vehicle for rent extraction. Economists believe that trade policy works differently than natural or geographical barriers to trade and other exogenous determinants, and trade can promote growth from the supply side; however, if the balance of payments worsens due to a fall in the price of countries tradeable, growth may be adversely affected from the demand side, because the payment deficit resulting from liberalisation on sustainable growth rate cannot be easily corrected by relative price of non-tradable or tradable goods.


We may conclude that foreign trade is not only increase the economic growth, but also to economic development. It should also be highlighted that the success of certain nations that have had fast growth has not followed a straightforward route of trade liberalisation since the government guides the economy via the use of subsidies. The growth of Asian nations benefited from open trade can be linked to how they dealt with important macroeconomic shocks, rather than trade policy alone. As a result, international commerce is required when an industry achieves a particular degree of maturity, as long as it is done gradually and selectively. According to the methodology of the Britton Wood institution, liberalisation is likely to result in the destruction of infant industries as well as the impossibility of establishing new ones, a situation that would only serve to confine low-income countries to the production and export of primary commodities.

Finally, in terms of policy implications, the government should promote more exporting goods and services in order to enhance international trade, which is a potent weapon for economic growth. Similarly, the government should monitor the value of its currency in relation to other currencies, i.e., the rate of exchange, because the research looked at the influence of exchange rates on economic development.

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