ECONOMICS DEVELOPMENT

CHAPTER 12
“INTERNATIONAL TRADE THEORY AND DEVELOPMENT STRATEGY”

Lecture’s: Dr. Putu Ayu Pramitha Purwanti,S.E.,M.Si.

NAME OF GRUP 9 :
1. Hilda Nurhidayati (14)
2. Maria Angely Simamora (19)

FACULTY OF ECONOMICS AND BUSINESS

UDAYANA UNIVERSITY
2023
 INTRODUCTION

International trade is a phenomenon that has long been at the center of attention in the
study of development economics. Amid the continuing process of economic globalization,
international trade has become increasingly important for developing countries. Chapter 12 in
the book "Economic Development" by Todaro and Smith discusses key issues relating to
international trade and development strategies. This paper will discuss some important aspects
of this material, focusing on issues that arise in chapter 12, including the meaning and impact
of economic globalization, basic questions about trade and development, the importance of
exports for developing countries, demand elasticity and instability of export earnings, as well
as Terms of Trade and the Prebisch-Singer Hypothesis.
 International Trade Theory and Development Strategy

12.1: Economic Globalization: Meaning, Extent, and Limitations

Economic globalization is a phenomenon that has changed the world's economic

landscape in an unprecedented way. The definition of economic globalization includes the
integration of economies around the world, involving various aspects, such as international
trade, foreign investment, information technology, labor mobility, and capital flows. Economic
Integration: Economic globalization creates strong interconnectedness and interdependence
between the economies of countries around the world. Countries no longer operate in isolation,
but rather engage in a global economic network. International Trade: One of the major aspects
of globalization is the increase in international trade. Goods, services and resources move freely
across national boundaries, opening up global market opportunities. Foreign Investment:
Foreign direct investment (FDI) plays an important role in globalization. Multinational
companies invest in different countries, creating deep cross-border operations. Information
Technology: Advances in information and communication technology have been a major
catalyst for globalization. The internet and other global communications connect the world in
unprecedented ways. Labor Mobility: Labor is increasingly mobile, both in the form of
international migration and in terms of competencies and skills. This creates a global labor
market. Economic globalization has reached unprecedented levels. Some aspects that illustrate
the extent to which globalization has progressed are: Increased International Trade: The
volume of international trade continues to grow rapidly. Goods and services are exchanged
more freely than ever before, supporting global economic growth. Financial Trade: The global
financial sector is increasingly integrated. Capital moves rapidly through international financial
markets, creating strong interconnections between countries. Information Technology: The
development of information technology has enabled worldwide business, communication and
electronic commerce. It has connected businesses, consumers and information around the
world. Foreign Direct Investment: Foreign direct investment has increased rapidly, with
multinational companies investing their capital in different countries. This creates complex
global supply chains. Labor Mobility: Labor mobility is growing, with significant international
migration and people seeking jobs abroad. While economic globalization brings great benefits,
there are also a number of limitations and challenges that need to be overcome: Economic
Inequality: Globalization can deepen income inequality, both within countries and between
countries. Economic benefits are often unevenly distributed, with most of the gains accruing to
a few. Vulnerability to Global Crises: The connectedness of the global economy makes
countries more vulnerable to global economic crises. Changes in one country's economy can
quickly spread to other countries. Environmental Impacts: Globalization can cause serious
environmental impacts, including increased consumption of natural resources and greenhouse
gas emissions. Loss of Cultural Identity: Globalization has also raised concerns about loss of
cultural identity and homogenization of global culture. Dependence on Global Markets:
Countries that are highly dependent on international trade can become particularly vulnerable
to global market fluctuations. Economic globalization is a complex phenomenon that has
changed the way the world operates in an economic context. While globalization brings many
benefits, such as access to global markets and economic growth, it also creates a number of
challenges that need to be addressed. Understanding the meaning, extent, and limits of
economic globalization is the first step in designing an effective strategy to optimize the benefits
of globalization while mitigating its negative impacts.

12.2: International Trade: Some Key Issues

12.2.1 Five Basic Questions about Trade and Development

International trade is a central topic in development economics, and there are five basic
questions that are often asked in the context of trade and development. In chapter 12 of the book
"Economic Development" by Todaro and Smith, these five questions help to outline the
complex issues associated with trade and its impact on the economic development of
developing countries.

Question 1: Is international trade always profitable for all countries?

This question highlights the importance of equity in international trade. While trade can
provide benefits, such as access to global markets and increased production efficiency, the
benefits are not always evenly distributed across countries. Countries with different resources
and capabilities may experience different impacts from trade. In some cases, trade can deepen
inequalities between countries.
Question 2: What is the impact of international trade on income distribution within
countries?

This question underscores that the impact of international trade is not only limited to
overall economic growth but also affects how income is distributed within countries. Trade can
increase the income of some people while leaving others poorer. Therefore, it is important to
consider the impact of income distribution in trade policy planning.

Question 3: Should developing countries focus on trade or domestic production?

This question raises the strategic issue of whether developing countries should favor
exports or domestic production. The appropriate strategy may vary depending on the country's
economic conditions and resources. Some developing countries may benefit from being more
open to international trade, while others may need to focus more on domestic economic
development.

Question 4: Should developing countries protect their domestic industries?

This question relates to protectionist policies often adopted by developing countries to

protect domestic industries from fierce international competition. While protecting certain
industries can help domestic industries grow and compete, it can also create trade barriers and
reduce economic efficiency.

Question 5: How does international trade affect the resilience of developing economies?

This question highlights the issue of economic resilience and vulnerability to changes
in the global economy. Developing countries that are highly dependent on international trade
may become more vulnerable to global economic fluctuations, including international
economic crises. Sustainable development strategies should consider how to manage economic
resilience in the face of global change.

In the context of these questions, Todaro and Smith discuss to provide insights into how
international trade affects the economic development of developing countries. These questions
also help design more effective policies to achieve sustainable and inclusive economic
development.
12.2.2 Importance of Exports to Different Developing Nations

The importance of exports to developing countries cannot be ignored. Exports are one
of the key aspects of the international economy that have a significant impact on the economic
development of developing countries. In this section, we will take an in-depth look at why
exports are so important for developing countries. One of the main reasons why exports are
important is because it allows developing countries to diversify their economies. Depending
too much on a limited sector of the economy can leave countries vulnerable to fluctuations in
commodity prices or changes in global demand. By developing a diversified export sector, these
countries can reduce economic risk. Exports can be an engine of economic growth. By selling
goods and services to international markets, developing countries can increase income and
create jobs. Revenue earned from exports can be reinvested in infrastructure development,
education, and other sectors that support long-term economic growth. Exports also provide
access to a larger global market. Developing countries can sell their products to countries
around the world, creating opportunities that were previously unavailable. This can reduce
dependence on domestic markets and expand sales potential. To compete in the global market,
developing countries often have to improve their production efficiency. This can encourage
innovation, technological upgrades, and improved product quality. As a result, economic
sectors can become more efficient and competitive. Revenue earned from exports can be an
important source of income for developing countries. Foreign exchange earned from exports
can also be used to pay for imports of goods that cannot be efficiently produced domestically.
The importance of exports to developing countries is enormous. Exports are not only a
significant source of revenue, but also a tool to boost economic growth, reduce dependence on
certain sectors, and open up opportunities for access to global markets. Therefore, developing
countries' economic development strategies often include efforts to increase and diversify their
exports.
12.2.3 Demand Elasticities and Export Earnings Instability

Demand elasticity and export revenue volatility are two important aspects to understand
when discussing the role of exports in developing economies. This section will elaborate more
on these two concepts and their implications. Export demand elasticity is a concept that
measures the extent to which the amount of goods or services exported from a country will
change in response to price changes. There are two important types of demand elasticities: High
Export Demand Elasticity: This means that the amount of goods or services exported is highly
responsive to price changes. In this case, a change in price can result in a significant change in
the volume of exports. Countries whose exports have a high elasticity of demand can more
easily adjust to price fluctuations in the international market. Low Elasticity of Export
Demand: Conversely, if export demand has a low elasticity, it means that price changes have
less impact on export volumes. Countries that rely on exports with low elasticity may be more
vulnerable to price fluctuations. Export revenue volatility refers to fluctuations in revenues
generated from exports of goods and services. This instability can be caused by several factors,
such as changes in global commodity prices, changes in global demand, or changes in factors
of production. The implications of export earnings volatility are: Budget Uncertainty:
Countries that rely heavily on volatile export revenues may find it difficult to plan their budgets.
Variable revenues can disrupt development planning and social programs. Economic
Vulnerability: Export revenue instability can make developing countries more vulnerable to
global economic fluctuations. When commodity prices fall or global demand declines, export
revenues can fall sharply, negatively impacting the domestic economy. The Need for
Diversification: To reduce the volatility of export earnings, developing countries are often
encouraged to diversify their economies. This means developing sectors of the economy that
are less dependent on certain exports. Economic Sustainability: Export revenue volatility can
be an obstacle to sustainable economic growth. Developing countries need to devise strategies
to cope with this uncertainty, including the establishment of reserve funds to offset fluctuations
in export earnings. In Todaro and Smith's book, the concepts of demand elasticity and export
revenue instability may be clarified with empirical examples and in-depth analysis. This helps
readers understand how price and demand fluctuations can affect export earnings and the
strategies that developing countries can take to overcome this instability in order to achieve
more stable and sustainable economic growth.

12.2.4 Terms of Trade dan Hipotesis Prebisch-Singer

These are two important concepts in development economics that help explain the
challenges faced by developing countries in international trade. Terms of Trade (ToT)
measures the ratio between a country's export prices and import prices. If the ToT increases, it
means that the country is earning more from the price of its exports compared to the price of
imports, potentially benefiting its economy. A favorable ToT can support a country's economic
growth as it increases revenue from exports and reduces import costs. However, unfavorable
ToT can be problematic for developing countries, especially if they rely heavily on primary
commodity exports. Fluctuations in primary commodity prices can negatively affect their ToT.
Meanwhile, The Prebisch-Singer Hypothesis suggests that primary commodity prices tend to
decline relative to manufactured goods prices in the long run. This means that countries that
rely on primary commodity exports may face a decline in export earnings relative to the cost of
importing manufactured goods. This decline in the relative price of primary commodities is
believed to occur due to less elastic global demand for primary commodities relative to
manufactured goods. This causes primary commodities to experience downward pressure on
their prices in the international market. The Prebisch-Singer hypothesis emphasizes the issue
of international trade inequality between industrialized countries and developing countries. It
describes the economic disparities faced by developing countries in international trade.

12.3 The Traditional Theory of International Trade.

A transaction is an exchange of two things, something is given up in return for

something else. Barter transactions The trading of goods directly for other goods in economies
not fully monetised

12.3.1 Comparative Advantage

Why do people trade? Basically, because it is profitable to do so. People usually find it
profitable to trade the things they possess in large quantities relative to their tastes or needs in
return for things they want more urgently. Because it is virtually impossible for individuals or
families to provide themselves with all the consumption requirements of even the simplest life,
they usually find it profitable to engage in the activities for which they are best suited or have
a comparative advantage in terms of their natural abilities or resource endowment. Comparative
advantage Production of a commodity at a lower opportunity cost than any of the alternative
commodities that could be produced. They can then exchange any surplus of these home
produced commodities for products that others may be relatively more suited to produce. The
phenomenon of specialisation based on comparative advantage arises, therefore, to some extent
in even the most subsistence economies. The principle of comparative advantage, as it is called,
asserts that a country should, and under competitive conditions will, specialise in the export of
the products that it can produce at the lowest relative cost. Absolute advantage Production of a
commodity with the same amount of real resources as another producer but at a lower absolute
unit cost.

12.3.2 Relative Factor Endowments and International Specialisation: The Neoclassical

Model

The classical theory of comparative advantage in free trade is based on the idea that
countries can benefit from trading with each other by specializing in the production of goods in
which they have a comparative advantage.
 The neoclassical factor endowment theory builds on the classical theory but introduces
the concept of factor endowments, which include land, labor, and capital. It explains how
differences in these factor endowments can lead to trade between countries.

The neoclassical theory assumes that all countries have access to the same technologies
for producing all goods. The basis for trade is not differences in technology but differences in
factor endowments. The theory suggests that countries will allocate their resources to produce
goods that make the most efficient use of their abundant factors. For example, labor-abundant
countries will specialize in labor-intensive products.

International Wage and Capital Cost Equalization. Over time, the theory predicts that
international trade will tend to equalize real wage rates and capital costs among countries. This
means that wages may rise in labor-abundant countries due to increased labor-intensive
production.

Trade can promote more equality in domestic income distributions within countries, as
the return to abundant resources, such as labor, increases. Stimulation of Economic Growth,
trade is seen as a driver of economic growth. It can stimulate investment, knowledge transfer,
and industrial output by allowing countries to access capital goods and technologies they lack
domestically.

The classical theory of comparative advantage, associated with economists like David
Ricardo and John Stuart Mill, laid the foundation for understanding the benefits of free trade.
It suggested that countries should specialize in producing goods in which they have a
comparative advantage, and through trade, all nations can benefit.

The neoclassical factor endowment theory builds upon this classical model but
incorporates the idea that countries differ in their factor endowments, such as land, labor, and
capital. However, it assumes that all countries have access to the same production technologies.
Trade, in this model, arises not due to differences in technology but because countries allocate
their resources differently based on their factor endowments.

Labor-abundant countries, for instance, are expected to specialize in labor-intensive

products, while capital-abundant countries will focus on capital-intensive goods. Over time, the
theory predicts that international trade will equalize real wage rates and capital costs among
countries. This means wages may rise in labor-abundant nations due to increased labor-
intensive production. Additionally, trade is believed to promote more equality in domestic
income distributions by favoring the returns to abundant resources like labor. Trade can also
stimulate economic growth by allowing countries to access capital goods, technologies, and
knowledge from other nations, ultimately leading to increased investment and industrial output.

In summary, the neoclassical factor endowment theory provides insights into how
differences in resource endowments drive international trade and how trade can lead to various
economic outcomes, including greater equality and economic growth.

12.3.3 Trade Theory and Development: The Traditional Arguments

1. Trade is an important stimulator of economic growth. It enlarges a country’s

consumption capacities, increases world output, and provides access to scarce resources
and worldwide markets for products without which developing countries would be
unable to grow.
2. Trade tends to promote greater international and domestic equality by equalising factor
prices, raising real incomes of trading countries, and making efficient use of each
nation’s and the world’s resource endowments (e.g., raising relative wages in labour-
abundant countries and lowering them in labour-scarce countries).
3. Trade helps countries achieve development by promoting and rewarding the sectors of
the economy where individual countries possess a comparative advantage, whether in
terms of labour efficiency or factor endowments. It also lets them take advantage of
economies of scale.
4. In a world of free trade, international prices and costs of production determine how
much a country should trade in order to maximise its national welfare. Countries should
follow the principle of comparative advantage and not try to interfere with the free
workings of the market through government policies that either promote exports or
restrict imports.
5. Finally, to promote growth and development, an outward-looking international policy
is required. In all cases, self-reliance based on partial or complete isolation is asserted
to be economically inferior to participation in a world of unlimited free trade.
12.4 The Critique of Traditional Free-Trade Theory in the Context of Developing-Country
Experience

Six basic assumptions of the traditional neoclassical trade model must be scrutinised:

1. All productive resources are fixed in quantity and constant in quality across nations, and
are fully employed.
2. The technology of production is fixed (classical model) or similar and freely available
to all nations (factor endowment model). Moreover, the spread of such technology
works to the benefit of all. Consumer tastes are also fixed and independent of the
influence of producers (international consumer sovereignty prevails).
3. Within nations, factors of production are perfectly mobile between different production
activities, and the economy as a whole is characterised by the existence of perfect
competition. There are no risks or uncertainties.
4. The national government plays no role in international economic relations; trade is
carried out among many atomistic and anonymous producers seeking to minimise costs
and maximise profits. International prices are therefore set by the forces of supply and
demand.
5. Trade is balanced for each country at any point in time, and all economies are readily
able to adjust to changes in the international prices with a minimum of dislocation.
6. The gains from trade that accrue to any country benefit the nationals of that country.

12.4.1 Fixed Resources, Full Employment, and the International Immobility of Capital
and Skilled Labour

• Trade and Resource Growth: North–South Models of Unequal Trade

The traditional theory of international trade assumes that resources are fixed,
fully utilized, and immobile, which does not reflect the dynamic nature of the real world
economy. Resources, including capital, entrepreneurial abilities, and skilled labor, are
constantly changing in both quantity and quality. This dynamic situation challenges the
assumption of comparative advantage and can perpetuate inequality between rich and
poor nations.
In reality, resources that are crucial for growth and development, such as capital,
entrepreneurial abilities, scientific capacities, and technical skills, are not fixed but
 continuously changing. These changes influence a nation's comparative advantage and
its ability to respond to international trade dynamics.
Rich nations, with abundant capital, entrepreneurial ability, and skilled labor,
often specialize in activities that use these resources intensively, leading to further
growth. In contrast, developing countries, with abundant unskilled labor, may specialize
in low-skilled, unproductive activities with unfavorable demand prospects. This can
lock them into stagnant situations, hindering domestic growth in crucial areas.
The traditional model assumes identical production functions for different
products in various countries, ignoring the dynamic nature of resource development.
This static efficiency can lead to dynamic inefficiency, where trade exacerbates
inequality and perpetuates resource underdevelopment in low-income nations.
Some economists have developed dynamic models of trade and growth that consider
factors like factor accumulation and uneven development. These models focus on trade
relations between rich and poor countries, acknowledging the unique challenges faced
by developing nations.
Michael Porter's Competitive Advantage of Nations introduces the concept of
qualitative differences between basic and advanced factors of production. While
standard trade theory applies to basic factors like natural resources and unskilled labor,
advanced factors include highly trained workers and knowledge resources. Developing
countries should prioritize the development of advanced factors to escape from the
limitations of factor-driven national advantage. This perspective emphasizes the need
for a more nuanced approach to international trade.
• Unemployment, Resource Underutilisation, and the Vent-for-Surplus Theory of
International Trade
Traditional trade models assume full employment, which does not align with the
reality of widespread unemployment and underemployment in developing countries.
The recognition of underutilized human resources in developing nations gives
rise to the vent-for-surplus theory of international trade. This theory suggests that these
countries can expand their productive capacity and Gross National Income (GNI) by
producing goods for export markets that are not in demand domestically.
According to the vent-for-surplus theory, previously underemployed land and
labor resources can be used to produce more output for export to foreign markets. This
theory is illustrated by a shift in production from point V to point B in a production
possibility analysis.
 Historically, the opening of developing nations to foreign markets, often through
colonization, provided the economic opportunity to utilize idle resources and expand
primary-product export production. However, in the short run, the benefits of this
process were often reaped by colonial and expatriate entrepreneurs.
While this approach may have provided short-term economic benefits, it
sometimes led to the structural orientation of developing-country economies towards
primary-product exports. This specialization inhibited the needed structural
transformation toward more diversified economies in the long run.

Consider a developing country with substantial underemployed labor and land

resources. Before trade, this country produces primary products (X) and manufactures
(Y) at point V, well below its production possibility frontier.
With the opening of foreign markets, due to colonial influence or other factors,
the country can now utilize its underemployed resources and expand primary-product
production to point B on the production frontier. This shift results in an increase in
primary product exports (X' - X), which can be exchanged for more imported
manufactures (Y' - Y).
While this process initially boosts economic activity, the benefits may primarily
flow to external entrepreneurs. Additionally, the country may become overly reliant on
primary-product exports, hindering diversification in the long term.
12.4.2 Fixed, Freely Available Technology and Consumer Sovereignty

Rapid technological change and the development of synthetic substitutes for traditional
products have transformed global trade. Additionally, the availability of Western-developed
technologies has allowed certain middle-income countries, like the Asian NICs, to move from
low-tech to high-tech production, changing their roles in international trade.

Since World War II, technological advancements have led to the creation of synthetic
alternatives for traditional primary products like rubber, wool, and cotton. This shift in
production has decreased the market share of developing countries in these sectors, affecting
their export earnings.

New technologies developed in the West have provided opportunities for some middle-
income countries, such as the Asian NICs, to benefit from Western research and development.
These countries, with their lower labor costs, can imitate products initially developed abroad
but not at the forefront of technological innovation. This strategy enables them to transition
from low-tech to high-tech production, filling manufacturing gaps left by more industrialized
nations. Some aim to catch up with developed countries, as exemplified by Japan, Singapore,
South Korea, and China's progress through this approach.

The assumption that consumer tastes dictate production patterns is unrealistic.

Multinational corporations, often supported by their home governments, disseminate capital,
production technologies, and influence consumer preferences through dominant advertising
campaigns. This influence is particularly notable in developing countries, where limited
information and imperfect markets lead to a situation of incomplete markets. For instance, in
many developing nations, over 90% of advertising is funded by foreign firms selling products
in the local market. This demonstrates how both local and international factors shape consumer
preferences and market dynamics, rather than solely relying on consumer choices.

12.4.3 Internal Factor Mobility, Perfect Competition, and Uncertainty: Increasing

Returns, Imperfect Competition, and Issues in Specialisation

The traditional theory of international trade assumes that countries can easily adjust
their economic structures in response to changing global prices and market demands. However,
this is often challenging, especially for developing nations, due to various structural and
institutional constraints.
 In traditional trade theory, it's assumed that countries can quickly adapt to changes in
international prices and markets by reallocating resources between industries. While this
concept may seem feasible on paper, structuralist arguments suggest that such reallocations are
exceptionally hard to achieve in practice.

This difficulty is particularly evident in developing countries where production

structures are inflexible, and factors of production (like capital and labor) cannot easily move
between industries. For example, in economies heavily reliant on a few primary-product
exports, the entire economic and social infrastructure may be geared towards supporting this
export-oriented system. Roads, railways, communications, and more are built to facilitate the
movement of goods for export.

Over time, significant investments have been made in these facilities, making it
challenging to shift these resources into other sectors like manufacturing. This inflexibility can
make developing nations vulnerable to fluctuations in international markets. Structural
rigidities, such as inelastic supply of products, limited access to intermediate goods, and poor
infrastructure, can hinder a developing country's ability to respond smoothly to changing
international prices. Unlike rich countries, they often lack the resources and capacity to adjust
quickly.

Moreover, when developing countries try to diversify their economies by producing

low-cost, labor-intensive manufactured goods for export, they often encounter barriers like
tariffs and nontariff measures imposed by developed countries to protect their domestic
industries. These barriers can hinder the growth of developing economies.

Additionally, the traditional trade theory overlooks increasing returns to scale and their
impact on international trade. Economies of scale, where production costs decrease as output
increases, can lead to monopolistic control by large corporations in global markets. These
corporations can manipulate prices and supplies, disadvantaging smaller competitors and
developing nations. Furthermore, the theory doesn't account for risk and uncertainty in
international trade. Depending heavily on unpredictable primary-product exports can be
detrimental to low-income countries due to the instability of global commodity markets.

In essence, the traditional trade theory's assumptions about easy resource reallocation,
diminishing returns to scale, and the absence of risk in international trade often don't align with
the complex realities faced by developing nations.
12.4.4 The Absence of National Governments in Trading Relations

In countries, the government can help balance things out when it comes to rich and poor
areas, fast and slow-growing industries, and how the benefits of economic growth are
distributed. They do this through various means like government through legislation, taxes,
transfer payments, subsidies, social services, regional development programmes, and so forth.

However, at the international level, there isn't a powerful government that can do the
same job. So, when countries trade with each other, sometimes one country gets much more out
of the deal than the other. And because there's no international "referee" to make things fair,
this unequal situation can keep going. Powerful countries also tend to protect their own
interests, even if it means helping out certain industries.

On the flip side, when governments in developing countries actively support certain
industries or coordinate investments to boost their exports, it can lead to impressive economic
growth, like we've seen in South Korea. But not all developing countries have been able to pull
this off. Governments can also use things like taxes on imports and exports to control trade and
influence their position in the global economy. But when richer countries make economic
decisions, it often affects poorer nations, while the reverse isn't true.

In the global economic arena, the bigger, more powerful countries usually have more
say. There isn't a super organization or world government to protect the interests of the weaker
nations, especially the least developed ones. So, when thinking about trade and industrial
strategies, we must consider the impact of these powerful governments from developed nations.

12.4.5 Balanced Trade and International Price Adjustments

The theory of international trade, like other perfectly competitive general-equilibrium

models in economics, is not only a full-employment model but also one in which flexible
domestic and international product and resource prices always adjust instantaneously to
conditions of supply and demand. In particular, the terms of trade (international commodity
price ratios) adjust to equate supply and demand for a country’s exportable and importable
products so that trade is always balanced; that is, the value of exports (quantity times price) is
always equal to the value of imports. With balanced trade and no international capital
movements, balance-of-payments problems never arise in the pure theory of trade.
12.4.6 Trade Gains Accruing to Nationals

In traditional trade theory, there's an assumption that the benefits of trade go to the
people in the trading countries. However, this assumption doesn't always hold true, especially
in developing countries.

In some of these countries, foreign companies might operate in ways that don't benefit
the local population much. They might pay low rents for land, use their own foreign capital and
skilled workers, hire local workers at very low wages, and not contribute much to the overall
economy. This depends on the bargaining power of these foreign corporations and the
governments of the developing countries.

The difference between two important economic measures becomes crucial here: GDP
(the value of everything produced within a country's borders) and GNI (the income actually
earned by the country's nationals). If much of a country's economy, like the export sector, is
owned and run by foreign entities, the GDP might be high, but the GNI, which reflects what the
country's people actually earn, could be much lower.

So, even though it might look like a developing country is benefitting from exports, in
reality, a big chunk of those benefits might be going to foreigners who own or control the
production factors involved. This is particularly true with multinational corporations operating
in these countries.

In essence, when analyzing a developing country's export performance, we need to dig

deeper and find out who really owns or controls the factors of production that gain from exports.

12.4.7 Some Conclusions on Trade Theory and Economic Development Strategy

We can now attempt to provide some preliminary general answers to the five questions
posed early in the chapter. We must stress that our conclusions are general and set in the context
of the diversity of developing countries. First, with regard to the rate, structure, and character
of economic growth, our conclusion is that trade can be an important stimulus to rapid economic
growth

Access to the markets of developed nations (an important factor for developing nations
bent on export promotion) can provide an important stimulus for the greater utilisation of idle
human and capital resources. Expanded foreign-exchange earnings through improved export
performance also provide the wherewithal by which a developing country can augment its
scarce physical and financial resources. In short, where opportunities for profitable exchange
arise, foreign trade can provide an important stimulus to aggregate economic growth.

But, as noted in earlier chapters, growth of national output may have little impact on
developmen. An export-oriented strategy of growth, particularly in commodities with few
linkages and when a large proportion of export earnings accrue to foreigners, may not only bias
the structure of the economy in the wrong directions (by not catering to the real needs of local
people) but also reinforce the internal and external dualistic and inegalitarian character of that
growth. It all depends on the nature of the export sector, the distribution of its benefits, and its
linkages with the rest of the economy and how these evolve over time.

The answer to the third question the conditions under which trade can help a developing
country achieve development aspirations is to be found largely in the ability of developing
nations. Also, the extent to which exports can efficiently utilise scarce capital resources while
making maximum use of abundant but presently underutilised labour supplies will determine
the degree to which export earnings benefit the ordinary citizen in developing countries. Again,
links between export earnings and other sectors of the economy are crucial. Finally, much will
depend on how well a developing nation can influence and control the activities of private
foreign enterprises. The ability to deal effectively with multinational corporations in
guaranteeing a fair share of the benefits to local citizens is extremely important

The answer to the fourth question whether developing countries can determine how
much they trade can only be speculative. For small and poor countries, the option of not trading
at all, by closing their borders to the rest of the world, is obviously not realistic. Not only do
they lack the resources and market size to be self-sufficient, but also their very survival,
especially in the area of food production, often depends on their ability to secure foreign goods
and resources. Moreover, for most developing nations, the international economic system still
offers the only real source of scarce capital and needed technological knowledge. The
conditions under which such resources are obtained will greatly influence the character of the
development process.

The fifth question whether on balance it is better for developing countries to look
outward toward the rest of the world or more inward toward their own capacities for
development turns out not to be an either/or question at all. While exploring profitable
opportunities for trade with the rest of the world, developing countries can effectively seek
ways to expand their share of world trade and extend their economic ties with one another.
 CONCLUSION

International trade plays an important role in the economic development of developing

countries. However, to maximize its benefits, it is important for such countries to understand
the key issues relating to trade and development, as discussed in chapter 12 of the book
"Economic Development" by Todaro and Smith. By understanding and addressing these
challenges, developing countries can develop more effective development strategies in the
current era of economic globalization.

The development of international trade theory has experienced two main stages:
traditional international trade theory and new international trade theory .New international trade
theory rises with the development of economic theory ,it constantly introduces new economic
concepts into the field of international trade research,explains the causes of the emergence and
development of international trade from the perspective of depth,and greatly promotes the
development of international trade theory research. The theory of international trade is always
following the new situation of international trade, especially with the rapid development of
productivity. However, history has proved that in most cases, international trade changes quietly
before the theory changes. The international trade environment nowadays is particularly
complex,
 REFFERENCE

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International Trade. American Journal of Industrial and Business Management, 12(06),
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Liu, X. (2022). New Development of International Trade Theory and Differentation of

International of International Trade Pattern International. International Journal os
Scientific Reserch, 1–2. https://doi.org/10.36106/ijsr/8623221

Saragih, H. S. (2022). Pengaruh Perdagangan Internasional Dan Investasi Terhadap

Pertumbuhan Ekonomi Indonesia. Journal Of Social Research, 1(5), 377–383.
https://doi.org/10.55324/josr.v1i5.37

Michael P. Todaro, Stephen C. Smith. 2020. Economic Development, 13th Edition Pearson
Education : Hoboken