Sources of Gain

According to the classical theory specialization based on the principle of comparative costs advantage is the major source of gain from internaitol trade. An additional source is the possibility of exploiting economies of scale when the size of the market is extended through the free foreign trade of a country. Adam Smith’s dictum is “Division of Labour” is limited by the size of markets. Obviously, when the size of the market expands as a result of international trade, the scope for large scale production and thus for complex division of labour and specialization, increases. Under economics of large scale, when specialisation occurs, the output per unit of impute may rise so that costs per units of output fall. This is a further source of gain from international trade which makes goods cheaply available.

As has been seen earlier the principle of comparative costs shows that it is possible for both countries to giant from trade, woven if one of them is comparative costs are different in different countries because the abundance of factors which are necessary for the production of each commodity does not bear the specialization based on comparative cost advantage clearly represents a gain to the trading countries in so far as it enables more of each variety of goods to be productized cheaply by utilizing the abundant factors fully in the country concerned and to obtain relatively cheaper goods through mutual international exchange. 

Further, the principle of comparative cost-difference of gains in international trade should not be looked upon merely as a possibility theorem, but as a positive hypothesis relating to the real world the doctrine of comparative costs predicts that in the real world there will begins from trade in terms of increased world production. As such each trading country will gain by hating relatively more and if it were self- sufficient. Though the validity of the theory of comparative costs hasn’t been conclusively proved. Its general hypothesis that production and consumption in the realty world and in each country would be higher under international trade than what it would be without it if all countries were forced to be completely self sufficient cannot, for obvious reasons, be rejected even by any empirical tests.

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