Relation between International Trade and World Output

Abstract

This paper seeks to explore the relationship between international trade and the general world output by discussing the pattern of international trade over the years as it has grown since the World War II. This is because most of the trade done today is between different countries some of which are not in the same continents or trading blocks that will be explored further in this paper.

This phenomenon is not only evidenced in the developed countries, but also in the developing countries, a concept that was earlier unimaginable, hence the great interest in the topic. This has been mainly attributed to the growing spirit of globalization and the advancement of different technologies which have made communication and especially transport not only fast, but also cheap hence turning the world into a global village.

Introduction

Trade is basically the exchange of goods and services between different parties, and in this case between different countries. International trade does not only involve the exchange of goods and services across international borders, but it has also evolved to include capital exchange and even exchange of vital ideas.

When these different countries increase their output, international trade also increases since there are more products to be exchanged in trade. Due to the diverse trading cultures, developing and also established economies came together and introduced a global organization that would harmonize the differences among these countries (Vaidya, 2006).

WTO would from then on monitor all international trading and settle any disputes that may arise. They would also monitor tariffs and ensure there is no discrimination towards any member country.

WTO being a permanent body has far much power in establishing law and order in order to avoid any oppression, and can hence establish a long lasting solution to many of the misunderstandings that often arise in commerce.

It has over 146 members making it a global organization that can exercise its power which would in most cases have an impact to the global economy. WTO also controls subsidies and quotas of different items that were initially not under any regulations. It has led to much more efficient banking freedom and confidence among member countries (Gallagher, 2005).

Pattern of International Trade

International trade has directly and indirectly affected the world output significantly. It has been noted that countries that rarely practice international trade remain poor and show very little or no growth at all.

The countries that have reduced trade barriers and increased in international trading have shown greater and faster growth compared to those with trade barriers and with no trading relations with the outside world (Zhang, 2008).

Exports have been one of the greatest boosts to individual country’s GDPs and imports has led to introduction of new technology and new inventions, which has resulted to improved living standards, faster trading, good relations, and peace between partner countries, with many other indirect benefits.

According to a study by World Bank, about twenty four developing countries that got involved in international trade in the world economy between 1980-1990 became more advanced in terms of better Medicare, schooling, increased GDP, longer life expectancy, low mortality rate in both children and the elderly and even per capita income of these countries greatly increased.

The study showed that the per capita income increased at an average rate of about 5% in these countries, while it grew at only 2% in developed countries. Countries like China, which is currently a global giant in terms of commerce and international trade, Hungary and India, were among the few countries that took advantage of the global market and this resulted to a sharp increase in their various GDP, which is still among the best, but lately strained by the Global economic meltdown.

Over the last two decades or so the growth of world trade has averaged about 6% per annum, which is as fast as the word output. The economic output is affected by various factors such as exchange rates, purchasing power parity, including human economic activity, among several others. International trade greatly increases the world output as it encourages completion to some level. It also motivates production of high standard goods with exceptional quality thus favoring the world output in monetary terms.

With a higher economic output, one can be sure to find countries expanding there trading with other countries since they have attained a higher bargaining power since they have a lot more to offer. Increased world economic output also brings about a near balance of trade that is almost similar to barter trade system, where one would offer an item for an item of the same value.

With this kind of trade, developing countries that produce valuable unfinished goods can actually trade these goods for other manufactured goods with added value instead of having to be expecting grants and relief from the developed countries.

Similar elements affect both international trade, and world output. This may include geographical segmentation of manufacturing processes similar nations trading in related goods, emergence of super trading economies such as the USA and China and producers that slice up the value chain.

Due to the current economic crunch, demand for imports has increased whereas the exports have decreased which was a phenomenon only evidenced during the World War II and the years thereafter. This has shown a significant drop in the world output, leading to lower GDPs. A lower GDP, especially for developed countries which have for a long time enjoyed a steady economic stability, means accumulating debts which will end up reducing international trade.

Aspects of international trade

As explained in the Ricardo and Heckscher-Ohlin theories, international trade is like new technology, which continuously adds up to the productive capacity of trading countries and the realized efficiency is mainly due to comparative advantage and proper utilization of increasing returns.

Trade in essence, greatly promotes dynamism and innovation as has been seen in the USA, Japan and China, to be especially due to competition. In return, thiscatapults world output to a whole different level. This proves that international trade and world output are actually interdependent (Wild, Wild and Han, 2003).

Increased trading and increased world output results in standardization of many elements such as tariffs, quotas and reduced trading barriers, which results in the theory of purchasing power parity. This is a theory of exchange rate adjustments in accordance to the law of one price.

It involves harmonizing prices between trading countries by using the normal exchange rate of currencies around the world. The failure of purchasing power parity across borders may involve additional expenses that arise along the trade, like transportation cost, duties on imports, spoilage for the case of agricultural and other perishable goods, among many others.

According to Ocampo and Martin, (2003), countries specialize in production of goods they are best at. This ensures a country exploits its ability to produce as much as it can of the commodity it produces best. This eliminates wastage of resources on non-viable production of commodities that such a country is not best suited to produce.

This model takes into consideration the technological differences between countries, especially between the developed and the developing countries. This model thus allows specialization and in a way leads to interdependence. It also leads to maximum output for individual countries and specialization leads to increased trade.

Without international trade, the consumption of countries would only be limited to their production capacities. Trade allows for specialization as countries can consume products which they don’t produce, with the effective exchange with that which it produces in abundance (Zhang, 2008). For instance Japan doesn’t produce grapes, but it is able to consume a lot of grapes which are imported from other countries, which in turn consume the electronics and vehicles that Japan has specialized in producing.

Conclusion

Therefore, it is imperative that international trade exists since lack of it will force countries to be contented with their own products that they produce with their available resources, which locks them out of the resources that they may not have (Zhang, 2008). It will also lead to the degeneration or slowdown of the advancements made in the communication and transport sectors as well as the exchange of information and knowledge whose consequences will be the detriment of global and local economies.

References

Gallagher, P. (2005). The first ten years of the WTO: 1995-2005. Cambridge UK: Cambridge University Press.

Ocampo, J., A. and Martin, J. (2003). Globalization and development: a Latin American and Caribbean perspective. New York: World Bank Publications.

Vaidya, K. (2006). Globalization: encyclopedia of trade, labor, and politics, Volume 1. New York: ABC-CLIO

Wild, J., J. Wild, K., L. and Han, J., C. (2003). International business. New York: Prentice Hall.

Zhang, W. (2008). International Trade Theory: Capital, Knowledge, Economic Structure, Money, and Prices over Time. New York: Springer.