Please review the following video to increase your understanding of the effect of specialization on gains from trade.
1) America has a comparative advantage in the production of goods that require large amount of research and development. For example- Defense product, pharmaceuticals, education and human resources, IT industry.
US have the comparative advantages in the production of these goods because we have huge capital in the market and all the research and development work takes a large amount of capital in the market. This make the capital relatively cheaper and increase the use of it, giving a comparative advantages. i.e., more output at a cheaper cost.
2) As the country got comparative in the production of rice, it is better for the country to export more and import less. This is because by exporting more, there will be increase in revenue of the country. Also due to increase in net exports, GDP rises.Step-by-step explanation
3) If there is trade surplus\, i.e., exports are greater than imports, there will be increase in net exports. As a result there is increase in GDP of the economy. Due to growth in GDP level of production of rise and thereby requirement of labor rises. hence, employment will rise. Also there is higher demand for domestic currency in the foreign market as a result, higher inflow of foreign market higher the foreign currency into the economy. Thus the domestic currency appreciates.
Suppose initially rice is exported from India to America and exchange rate in $1 = 72 Indian rupees. If there is trade surplus then exchange rate become $1=70 Indian rupees. In case of trade deficit, imports are greater than exports. So, GDP of the economy falls as a result production falls as well as the level of employment. In this case there i higher demand for foreign currency and domestic currency depreciates. Exchange rate increases to $1 = 75 Indian rupees.
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