Basis of External Trade

Theoretically, the modern international trade has its foundations in the concept of division o flab our. Each country enjoys certain economies and special advantages in the production of such goods.  It devotes itself wholly to the production of such goods and meets its requirements of other goods and products by exporting the surpluses of its own specialties in exchange for the specialties of other countries. In economic theory, this principle has been christened as the theory of comparative costs.

This theory of international trade states that every country will produce those goods in the production of which it is favorably placed on account of its climate, the quality of its national resources, the characteristics of its people etc. By concentrating on those goods in which it has special advantage, a country produces more than it requires for its won needs, exchanges the surplus with other countries against goods which it is less suited to produce or which it cannot produce at all. In other words, every country produces and exports goods in ht reproduction of which it has cost advantages sand imports those goods in the production of which it has cost disadvantages. Let us take a simple example to understand the theory of comparative costs. Suppose in India 10 days of labor will product 100 units of cloth and in Pakistan, 10 days of labor will produce 80 units of wheat or 40 units of cloth. Here, India has an absolute advantage over Pakistan in the production of both the goods, yet she has comparative advantage over Pakistan in the production of cloth. Pakistan, on the other hand, had comparatively less disadvantage in the production of wheat than in that of cloth. When international trade takes place, India will specialize in the production of cloth and Pakistan in the production of wheat.

From the above, it will be seen that international trade brings about division of labor among nations leading them to specialize in the production of certain commodities and importing the others. This has the effect of turning the resources of the nation to the most efficient use and raising the standard of living of the propel by getting them a wide rage of products all of which cannot be produced in the country. It is because of interracial trade that a country like the U.K. has been able to advance industrially without having had to produce tits needs of foodstuffs and raw materials.

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