Benefits of Trade for Developing Countries - Essay Example

A labour-intensive good is a good, production of which requires larger labour input than capital input in terms of costs (Labor-intensive, n.d.).
Marginal Rate of Transformation represents the slope of Production Possibility Frontier in a certain point, which defines the rate of trade-offs between different goods. The slope is usually concave from the origin, which means, that opportunity costs increase with increasing production of a good. In the example above the Production Possibility Frontier is a straight line, which represents constant opportunity costs for different combinations of goods' production (Mankiw, 2011). A labour-abundant country is a country, which has labour as an abundant factor, compared to capital, and produces mostly labour-intensive goods (Xu, 2003).

A capital-abundant country is a country, which has capital as an abundant factor, compared to labour, and produces mostly capital-intensive goods (Xu, 2003). Trade plays important role in reducing poverty in developing countries and increasing their growth rates. According to the European Commission trade gives the following advantages to the developing countries: it increases commercial opportunities of a country; contributes to the improvement of the value chain of a product, which makes it more competitive; promotes innovations in the country; increases investments into the country; expands export of local producers to other countries; generates employment opportunities; influences exchange of experience and strengthens economic and social ties between developing and developed countries (European Commission, n.d.).