(i) Shift in Terms of Trade:
A shift in terms of trade becomes highly likely when trading economies experience economic growth and changes in their production patterns.
Depending upon the interaction of a host of relevant determining forces (including the elasticity’s of demand and supply for imports and exports), actual change in terms of trade can be in any direction and to any extent with a corresponding impact on their respective gains from trade.
(ii) Change in Per Capita Income:
Economic growth of a country does not guarantee a proportionate increase in its per capita income, since the latter is also affected by its population growth. Other things being equal, a country with low per capita income consumes a greater proportion of its domestic production.
This retards the growth of its external trade and the gains which it derives from it. This is what generally happens to underdeveloped countries and to small and marginal farmers in such economies, at the micro-level. They remain tied to a low level of per capita income with relatively low volume of trade.
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(iii) Growth of Export Sector:
Without the development of its export sector, economic growth of a country and an increase in its per capita income do not result in an expansion of its foreign trade. For example, a poor economy may grow by producing more of those items which are essential for its domestic consumption.
Or, its products may not be able to compete in international markets because of poor quality and high prices. Or, a country may be deliberately pursuing a growth strategy based upon “self-sufficiency” and economic isolation (also termed “inward looking”).
For example, for nearly four decades after Independence, India pursued a policy of import substitution rather than that of export promotion.
It was believed by us that “self-sufficiency” was better than “self-reliance”, perhaps as a backlash to our subjugation by an Imperial Britain, and an allergy for things foreign.
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An important component of this policy was to discourage foreign direct investment and use external loans without experiencing commensurate growth in our export sector.
This policy, by its very nature, fed a persistent scarcity of foreign exchange and necessitated further restrictions on imports. Simultaneously, our export became increasingly less competitive in international markets.
(iv) Product Differentiation:
Normally, product differentiation is one of the salient characteristics of the growth of a market economy. To the extent this happens, it promotes intra-industry trade between countries.
(v) Spill-over Effects of Trade:
In recent decades, economists have identified several trade-associated sources of gains. Economic contact with rest of the world exposes a country to alternative and more productive institutional arrangements, work methods and management techniques. There is an increased exchange of technology and know-how between them either on the basis of trade or otherwise.
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An important long term gain of international trade is the availability of a greater variety of goods and services, including those which cannot be produced domestically.
For example, production of some spices, tea, coffee, etc, is confined only to warm and temperate climates. It would be highly uneconomical to produce them in cold climates.