When considering the impact of reduced international transportation costs on international trade, it is essential to examine how this factor influences various aspects of the global market.

This reduction in transportation costs can lead to significant shifts in trade dynamics, affecting volume, gains, income distribution, and specialization.

In this context, option (a) – an increase in the volume of trade – is the correct choice. This is because lowered transportation costs facilitate easier and more cost-effective movement of goods across borders, leading to an expansion in the overall volume of international trade.

Explanation of the Correct Answer : a. Increase in the volume of trade

Reduced transportation costs translate to lower expenses for businesses engaged in international trade. As a result, they can offer their products at more competitive prices in foreign markets. This, in turn, leads to increased demand for these goods, driving up the volume of trade.

Moreover, companies may now consider trading in products that were previously considered unfeasible due to high transportation expenses. This diversification further boosts the volume of international trade, making option (a) the correct choice.

Explanation of Incorrect Options:

b. Smaller gain from trade:

This option implies that reduced transportation costs would lead to smaller overall gains from international trade. However, this is not the case. When transportation costs decrease, it means that businesses can ship their products to foreign markets more efficiently and at a lower cost.

As a result, they can offer their goods at more competitive prices, which tends to stimulate demand and increase sales. This, in turn, leads to higher profits and gains from trade, rather than smaller ones.

c. Decline in the income of home producers:

This option suggests that a reduction in transportation costs would result in a decrease in the income of domestic producers. However, the opposite is typically true. Lower transportation costs benefit home producers by expanding their potential customer base.

They can now access international markets more readily, allowing them to sell their products to a wider audience. This increased market reach often leads to higher sales volumes and, consequently, higher incomes for domestic producers.

d. Decrease in the level of specialization in production:

Reduced transportation costs actually tend to encourage greater specialization in production. When it becomes more cost-effective to transport goods internationally, producers have the opportunity to focus on what they do best and produce those goods in larger quantities.

This specialization leads to increased efficiency and productivity, as producers can allocate their resources more effectively. Therefore, lower transportation costs are more likely to lead to an increase in specialization rather than a decrease.

Conclusion: In conclusion, when international transportation costs decrease, the effect on international trade is primarily characterized by an increase in the volume of trade. This is due to the newfound accessibility of markets and the ability of businesses to offer products at competitive prices.

While other options may have some relevance in different economic contexts, they are not directly linked to the reduction of transportation costs in the scenario described.

The incorrect options (b), (c), and (d) do not accurately reflect the economic dynamics at play when international transportation costs decrease. Therefore, option (a) stands as the most accurate choice in this context.