Contribution of Foreign Trade to Economic Development:
Foreign trade contributes to economic development in a number of ways.
• It provides flow of technology which allows for increases in total factor productivity, and some short-run multiplier effects for countries with unemployed labour.
• It generates pressure for dynamic change through: (i) competitive pressure from imports, (ii) pressure of competing for export markets, and (iii) a better allocation of resources.
• Exports allow increased exploitation of economies of scale, separation of production patterns from domestic demand, and increasing familiarity with absorption of new technologies.
• These, in turn, help increase the profitability of the domestic business without any corresponding increase in price.
• Foreign trade increases most workers' welfare. It does so at least in four ways: (i) larger exports translate into higher wages; (ii) because workers are also consumers, trade brings them immediate gains through cheaper imports; (iii) it enables most workers to become more productive as the goods they produce increase in value; and (iv) trade increases technology transfers from industrial to UDCs and the transferred technology is biased in favour of skilled labour.
• Increased openness to trade has been strongly associated with the reduction of poverty in most developing countries, as the historian Arnold Toynbee said 'civilisation' has been spread through 'mimesis': simple copying.