ideas of Absolute Advantage, Terms of Trade and Export Promotion in International Trade

The principle of comparative cost advantages is not absolutely a practical one in contemporary foreign trade, so therefore the need to have an absolute. Terms of trade and export promotion are very valuable in manufacture an international trade process very successful. How can these elements help?

The principle of Absolute Advantage

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This was propounded by Adam Smith and it states that a country should specialize in the production of a commodity or commodities and services in which it has absolute benefit over other countries. Agreeing to Adam Smith, a country has an absolute benefit over other countries if it can furnish a commodity or assistance which other countries cannot produce. Again, absolute advantages where she can furnish the two commodities involved at the least cost.

Terms of trade

This is the rate at which a country's exports exchange for its imports. It is expressed as a relationship in the middle of the prices a country receives for its exports and the prices it pays for imports. In other-words, it is the price ratio in the middle of exports and imports. It is ordinarily measured by the mathematical method below:

(index of export price/ index of import price) X 100

A country's terms of trade are said to improve when this division growth and to worsen when it decreases. It is convenient if the mean price of exports is higher than the mean price of imports. Exports come to be relatively more high-priced than imports. The index of terms of trade would therefore be more than 100. If the prices of exports rise in relation to the prices of imports, it will improve, since a given quantity of exports will pay for more imports. If favorable, it leads to a rise in the real national income. The terms of trade are unfavorable if the mean import price is higher than the mean export price, which results in more high-priced imports than exports and this situation worsen terms of trade. When terms of trade are unfavorable, the index would be less than 100 and this reduces the real national income.

Export promotion

This is also known as export drive and it is any course by which government encourages producers of export goods to furnish and export more in order to earn more foreign exchange. Government can take measures towards export promotion and such measures are' reduction of export duties, subsidy for export based industries, granting of tax incentives; setting up of export promotion agencies; retention of part of foreign exchange; infrastructural development; reduction of freigth rate; granting of prestige facilities, devaluation of local currency and organizing international trade fairs.

ideas of Absolute Advantage, Terms of Trade and Export Promotion in International Trade

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