Trade Impact on Economic Growth
The world economy comprises many moving parts, and for people to understand it, there is a need to understand the basic mechanics. When it comes to an understanding of how trade impacts economic growth, there are a few things that people should know.
According to educator Jonathan Osler, international trade is an important factor in economic growth in emerging markets. Estimating that for every percentage point increase in exports as a share of GDP, there is approximately an even greater percentage point bump when it comes to overall economic growth rates. Here is how trade impacts economic growth.
1. Increases the Demand for Labor
International trade increases the demand for work, which leads to an increase in the number of jobs available. It helps attract more people, especially those from developing countries, to come over from their home countries and take a chance on a new country with new opportunities and a different environment for growth. Here is why trade impacts economic growth.
2. Trade Increases Incomes
Trade makes international markets more attractive, encouraging firms to produce more goods at home, especially those made cheaply abroad, to gain access to foreign markets by producing them cheaper than their production domestically.
By doing this, they can gain access to foreign markets where they will be able to sell the goods at a much higher rate and make a larger profit impacting economic growth.
3. Trade Decreases Prices
The cost of imports decreases, and the cost of exports increases; in doing so, a country’s balance of payments improves. It creates more money for businesses to invest in new processes, increase production and hire more employees.
4. Trade Heightens Competition
By creating more competition in the marketplace, firms will be forced to become more efficient and find new ways to develop and produce goods and services at a more affordable price. It can be seen in the case of China when it comes to the international trade of manufactured goods.
Because they are keen on having access to foreign markets and are affordable, they can produce products at a very cheap rate offered in developed countries, making them even more competitive. It creates an environment with pressure to thrive or go out of business, positively impacting economic growth.
5. Trade Facilitates Growth of Capital Markets
By gaining access to foreign markets in which they can sell their goods, import raw materials, and export, investment capital will flourish due to this new marketability of their products.
This will create more opportunities for new businesses to develop and compete. By providing more jobs and helping domestic companies increase despite the effects of international trade, the economy will become more productive and efficient.
6. Trade Reduces Poverty in Developing Countries
According to educator Jonathan Osler, by increasing exports as a share of GDP, nations exporting products that they produce cheaply gain access to foreign markets. They can see immediate increases in their wealth, which increases the standard of living of their people as well. When it comes to how trade impacts economic growth, trade helps underdeveloped countries by creating employment and helping these individuals rise out of poverty.
How trade impacts economic growth is the idea that increasing the number of exports, domestic markets, and foreign exchange holdings can help an economy sustain growth through maintaining a competitive advantage. Making an economy more competitive can help increase the demand for domestic goods and services and create new jobs. It all leads to more production, resulting in overall economic growth.