Definition Of Trade

Trade is essentially an international transformation of commodities, inputs and technology which

promotes welfare in two ways. It extends the market of a country’s output beyond national frontiers
and may ensure better prices through exports. Through imports, it makes available commodities,
inputs and technology which are either not available or are available only at higher prices, thus
taking consumers to a higher level of satisfaction.

Trade is also called the exchange of goods economy, is to transfer of the commodities from one
person to another. Sometimes trade is also called in simple terms as commerce or financial
transaction of barter. Where the transfer of the commodities between the persons took place is
called a market. If we through light on the history of trade, the original form of trade was barter,
where direct exchange of goods and services took place. With the passage of time the barter system
was replaced by the money exchange system in which the commodities are transferred through a
medium of exchange such as money. By the invention of money the trade got greatly promoted.
The trade between, two traders or two economies is called bilateral trade, while the trade between
more than two countries are more than two economies is called multilateral trade. The fundamental
trade is to explain why the two persons or the two nations trade with each other respectively. As
the nature has distributed the resources unequally on the surface of earth. Therefore, it is quite
difficult that each and every nation can produce all the commodities which its people require for
their consumption.

Theory Of Trade

It appears that the evolution of trade theory, from old trade doctrines to the NTT (New Trade
Theory), has impacted policy at two levels. The first relates to the continuing support of the free
trade doctrine to determine policy for developing areas. As is expected, the push comes from the
advanced nations, both at the intergovernmental level and at multilateral institutions like the IMF
and the WTO. The second impact of trade theory relates to policies pursued by the advanced
nations, which relies considerably on the NTT doctrines of strategic trade.
Theory of international trade is called the Absolute Advantage Theory. The economists of classical
school badly criticised the doctrines of mercantilism and favoured free trade which benefited all
the trading countries. In their theory of international trade the classical economists tried to explain
two basic problems. The theory is based upon many assumptions such as cost of production of two
communities in the two countries is absolutely different, there are only two countries, both the
countries can produce only two goods. labour is homogenous and is only the factor of production.,
labour can move within a country but immobile internationally, labour is used in fixed proportions
in both the countries, no transportation cost occurred, use of constant technology took place,
constant cost of production and both the countries involved in barter trade.

Definition Of Aid

Economic, technical, or military aid given by one nation to another for purposes of relief and
rehabilitation, for economic stabilization, or for mutual defense. Some experts charges that aid has
enlarged government bureaucracies, perpetuated bad government, enriched the elite in poor
countries, or just been wasted. Other argues that although aid has sometimes failed, as they have
supported poverty reduction and growth in some countries and prevented worse performance in
other

The standard definition of foreign aid comes from the Development Assistance Committee (DAC)
of the Organization for Economic Cooperation and Development (OECD), which defines foreign
aid (or the equivalent term, foreign assistance) as financial flows, technical assistance, and
commodities that are (1) designed to promote economic development and welfare as their main
objective (thus excluding aid for military or other non-development purposes); and (2) are
provided as either grants or subsidized loans.
Theory Of Aid

The Harrod-Domar model, points out that output depends on the investment rate and the
productivity of that investment. In an open economy, investment is financed by savings which is
a sum of domestic and foreign savings. This model explains economic growth in terms of a savings
ratio and capital-output coefficient.

The standard model used to justify aid was the ‘two gap model’ of Chenery and Strout (1966)
which has been already referred to in the previous sections. In this model the first gap is between
the amount of investment necessary to attain a certain rate of growth and the available domestic
savings (the saving gap). The second gap is the trade gap or foreign exchange gap. This occurs
when there is a gap between import requirements for a given level of production and foreign
exchange earnings. Even though the saving investment gap would be small, a larger trade gap
would undermine productive investment due to limited imports of capital goods needed for
investment. It is argued that at any moment in time one gap is binding in aid recipient countries
thus foreign aid is required to fill that gap. The ‘two gap model’ supports the hypothesis of
investment-limited growth based on the Harrod- Domar model which assumes a specific amount
of investment to increase growth.

The three gap model, refers to the saving- investment gap, trade gap and the fiscal gap. The fiscal
gap refers to a gap between government revenues and expenditures although the fiscal gap is a
subset of the saving gap. Due to this fiscal gap, government efforts to stimulate private investment
may be restrained when government resources for investment and imports are insufficient, among
other things, as a result of debt service.
Refferences:

Anderson, James. (2008). International Trade Theory. 1-10.

Randhawa, G. K. (2012). Foreign aid in economic development. International Journal of

Computing & Business Research, 1-10.

Reddy, S., & Minoiu, C. (2009). Development aid and economic growth: A positive long-run
relation (No. 9-118). International Monetary Fund.

Vijayasri, G. V. (2013). The importance of International Trade in the World. International Journal
of Marketing Financial Services and Management Research, 9(2), 111-9.