Question

Consider two countries Pakistan and USA trading with each other, with Pakistan exporting garments to USA and USA exporting aircrafts to Pakistan.

Use the Standard Trade Model to illustrate the gains from trade between USA and Pakistan, assuming that USA has an abundant supply of capital relative to Pakistan and Pakistan is rich in labor resources. Assume also that consumer preferences for both goods (garments and aircrafts) are similar in the two countries and trade is costless.

Answer 1

As we know that USA is the most developed country of the world. The US is in the top of list when take GDP is taken into consideration. On the other hand Pakistan is the developing country of the world with low GDP level. The two countries have different type of technologies and resources. The USA has uses the capital intensive technologies and is lacking the adequate manpower. The Pakistan on the other hand is labour abundant and has the adequate labour force available.

The Pakistan is at the 56th rank in terms of exports with USA. The two countries are also having the international trade relationship with one another. The USA is exporting capital intensive goods to the Pakistan and Pakistan is exporting labour intensive goods to USA. As we know that USA has abundant capital available and Pakistan has abundant of labour available. Pakistan exports garments to USA, which is a labour intensive good and USA exports aircraft's to Pakistan which is a capital intensive good.

In both the countries the consumer prefeence are such, that both goods are being preferred by the consumers. When two countries engage in international trade with one another , they obviously gain from the trade. The gains from the trade are those benefits , which both get by exporting to one another. Both countries gains by exporting and these gains are due to specialisation and division of labor. The countries have the comparative advantage in each of the goods they produce. There are two types of gains to both countries static gains and dynamic gains. Static gains from trade refer to the increase in production or welfare of the people of the trading countries as a result of the optimum allocation their given factor-endowments, if they specialise on the basis of their comparative costs.On the other hand, dynamic gains refer to the contributions which foreign trade makes to the overall economic growth of the trading countries.