Capital Formation

Capital Formation

 One of the most impart the effect of trade is the formation of capital in the economy. The propensity to save increases with the increases in the real income, which increases with better allocation of the resources that are associated with international trade. In particular, international trade plays a critical role in promoting investment in the economy, and this raises the rate at which capital is formed in the economy. Foreign trade promises increased returns due to the existence of broader markets, and this stimulates capital formation in the economy. As traders in the economy get access to foreign markets, they are likely to adopt techniques of production that are more advanced. By adopting the new and better method of production, the economy is better to benefit from capital formation (Adhikary, 2011). Furthermore, through trade, a country is able to crucial foreign capital that further promotes production in the economy.

   Production Efficiency 

Another critical aspect of trade it helps in that trade results in the international specialization. International specialization allows countries to produce goods and services that they can produce at the lowest cost possible. As a result of specialization. The country gains knowledge and special advantage over the others, and this makes such a country to gain a lot of income (Timmer, Miroudot, & de Vries, 2019). As a result of this specialization. A country is able to employ the productive forces of the world efficiently. Thus, the country is able to utilize the resources available better because it is able to concentrate in a few areas of production. Specialization helps the workers to master skills, and this raises the productivity of the country and thus increases the real income in the economy. Through specialization, countries are able to grow their economy because the cost of production is low and acquisition of what a country does not produce cheaper because it is produced in the most cost effective manner.

References

Adhikary, B. K. (2011). FDI, trade openness, capital formation, and economic growth in Bangladesh: a linkage analysis. International Journal of Business and Management, 6(1), 16.

Timmer, M. P., Miroudot, S., & de Vries, G. J. (2019). Functional specialization in trade. Journal of Economic Geography, 19(1), 1-30.