P/E/47 International trade and its role in economic development

International trade affects the economy such that it increases the Aggregate Demand (AD) as well as becoming a source of inputs for production. International trade based on the theory of comparative advantage will improve efficiency in allocating resources, as well as allow firms to reach economies of scale, thereby reaching competitive prices of international markets. When an economy involves itself in trade, under the right circumstances, it is able to shift the Production Possibility Curve (PPC) curve outward, and achieve greater levels of output. This increase in production can be achieved through the use of more resources and through the means of using the resources of labor, capital and land more efficiently, which international trade is also involved in. This increase in production is known as economic growth, which signifies economic development as well. Despite of its negative effects, international trade greatly improves the standard of life for people.