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Describe six importance of foreign trade in economic development of a nation

      

Describe six importance of foreign trade in economic development of a nation.

  

Answers

Abdullahi
1. Foreign trade possesses great importance to underdeveloped countries in that it provides the urge to develop, the knowledge and experience that make development possible and the means to accomplish it. When a country specializes in the production of few goods due to international trade and division of labor, it exports those commodities which it produces cheaper in exchange for what others can produce at a lower cost. It gains from trade and there is increase in national income which in turn, raises the level of output and the growth rate of the economy. Thus the higher level of output through trade tends to break the vicious cycle of poverty and promotes economic development.

2. An underdeveloped country is hampered by the small size of its domestic market which fail to absorb sufficient volume of output. This leads to low inducement to invest. The size of the market is also small because of low per capita income and of purchasing power. International trade widens the market and increases the inducement to invest income and savings through more efficient resource allocation. Moreover, many underdeveloped countries specialize in the production of one or two staple commodities. If efforts are made to export them, they tend to widen the market. The existing resources are employed more productively and the resources allocation becomes more efficient with a given production function.

3. Foreign trade helps to transform the subsistence sector into monetized sector by providing markets for farm produce and raises the income and the standards of living of the peasantry.

4. Foreign trade helps to exchange domestic goods having low growth-potential for foreign goods with high growth potential. The staple commodities of underdeveloped countries are exchanged for machinery, capital goods, raw materials and semi-produced products required for economic development. Being deficient in capital goods and materials, they are able to quicken the pace of development by importing them from developed countries.

5. Foreign trade possesses an “educative effect”. LDCs lack in critical skills which are a greater hindrance to development. Foreign trade helps in accelerating the development of poor countries by facilitating the selective borrowing of ideas, skills and know-how from developed countries and adopting them in accordance with their factor endowments.

6. Foreign trade provides the basis for the importation of foreign capital in LDCs. If there were no foreign trade, foreign capital would not flow from the rich to poor countries. The volume of foreign capital depends, among others factor, on the volume of trade. Foreign capital not only helps in increasing employment, output and income but also smoothens the balance of payments and inflationary pressures.

7. Foreign trade benefits an LDC indirectly by fostering healthy competition and checking inefficient monopolies. Healthy competition is essential for the development of the export sector of such economies and for checking inefficient exploitative monopolies that are usually established on grounds of infant industry protection.
Dullayo answered the question on August 10, 2018 at 04:34

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