Introduction

What Is International Trade?

• International trade is the exchange of goods and services between countries
• Trading globally gives consumers and countries the opportunity to be exposed
to goods and services not available in their own countries.
• Almost every kind of product can be found on the international market: food,
clothes, spare parts, oil, jewelry, wine, stocks, currencies, water.. etc.
• Services are also traded: tourism, banking, consulting and
transportation
• If there is a trade of goods and services, then there will be
a money flow; inflow and outflow

• Reason for Trade #1: Differences in Technology

Advantageous trade can occur between countries
if the countries differ in their technological
abilities to produce goods and services.
Technology refers to the techniques used to turn
resources (labor, capital, land) into outputs
(goods and services).

• Reason for Trade #2: Differences in Resource Endowments

Advantageous trade can occur between countries if the countries differ in their
endowments of resources. Resource endowments refer to the skills and abilities
of a country’s workforce, the natural resources available within its borders
(minerals, farmland, etc.), and the sophistication of its capital stock (machinery,
infrastructure, communications systems).

• Reason for Trade #3: Differences in Demand

Advantageous trade can occur between countries if demands or preferences
differ between countries. Individuals in different countries may have different
preferences or demands for various products.
For example,
the Chinese are likely to demand more rice than Americans, even if consumers
face the same price.
Canadians may demand more beer,
The Dutch more wooden shoes, and
The Japanese more fish than Americans would, even if they all faced the same
prices.

• Reason for Trade #4: Existence of Economies of Scale in Production

The existence of economies of scale in production is sufficient to generate
advantageous trade between two countries. Economies of scale refer to a
production process in which production costs fall as the scale of production rises.
This feature of production is also known as “increasing returns to scale.”

• Reason for Trade #5: Existence of Government Policies

Government tax and subsidy programs alter the prices charged for goods and
services. These changes can be sufficient to generate advantages in production of
certain products. In these circumstances, advantageous trade may arise solely
due to differences in government policies across countries.

• Some Important Concepts

Export and Import: A product that is sold to the global market is an export, and a
product that is bought from the global market is an import. Imports and exports
are accounted for in a country's current account in the balance of payments.

Trade surplus: An economic measure of a positive balance of trade, where a

country's exports exceeds its imports.

Efficiency of Trading Globally

• Global trade allows wealthy countries to use their resources - whether labor,
technology or capital - more efficiently. Because countries are endowed with
different assets and natural resources (land, labor, capital and technology).
• some countries may produce the same good more efficiently and therefore sell
it more cheaply than other countries.
• If a country cannot efficiently produce an item, it can obtain the item by trading
with another country that can. This is known as specialization in international
trade.

• Balance of payments (BOP):

The balance of payments of a country is the record of all economic transactions
between the residents of a country and the rest of the world in a particular period
(over a quarter of a year or more commonly over a year). These transactions are
made by individuals, firms and government bodies.

Relation of Foreign Trade to National Income:

•The impact of international trade can be judged from the balance of
payments of a country.
•When the exports of a country exceed its imports, there is a flow of
money income into the country and the level of national income and
employment goes up. On the other hand, when imports exceed
exports, there is a withdrawal of national income.
•How much the volume and value of exports of a country will be
depends upon the extent of the market for the goods of the country

Advantages of international trade

• Nations with strong international trade have become rich and have the power
to control the world economy.
• The global trade can become one of the major contributors to the reduction of
poverty.
• The rise in the international trade is essential for the growth of globalization

Some more advantages

• (i) Economy in the Use of Productive Resources: Each country tries to produce
those goods in which it is best suited. As the resources of each country are fully
exploited, there is thus a great economy in the use of productive resources.
• (ii) Wider Range of Commodities: International trade makes it possible for each
country to enjoy wider range of commodities than what is otherwise open to it.
The commodities which can be produced at home at relatively higher cost can be
brought from the cheaper market from abroad and the resources of the country
thus saved can be better employed for the production of other commodities in
which it is comparatively better fitted.
• (iii) Scarcity of Commodities: If at any time there is shortage of food or scarcity
of other essential commodities in the country, they can be easily imported from
other countries and thus the country can be saved from shortage of commodities
and low standard of living.
• (iv) Promotes Competition: International trade promotes competition among
different countries. The producers in home country, being afraid of
the foreign competition, keep the prices of their products at reasonable level.
• (v) Speedy Industrialization: International trade enables a backward country to
acquire skill, machinery; and other capital equipment from industrially advanced
countries for speeding up industrialization.
• (vi) Fall of Prices prevented: A country can export her surplus products to a
country which is in need of them. The home prices are, thus,
prevented from falling.
• (vii) Extension of Means of Transport: When goods are exchanged from one
county to another, it leads to an extension of the means of communication and
transport.
• (viii) Socioeconomic integration: International trade offers facilities to the
citizens of every country to come in contact with one another. it makes them
realize that no country in the world is self-sufficient. It thus promotes
peace and goodwill among nations. Disadvantage of international trade

• International trade has its own demerits/disadvantages.

These, in brief are as follows:
• (i) Exhaustion of Resources: In order to earn present export advantages a
country may exploit her limited natural resources beyond proper limits. This may
lead to exhaustion of essential material resources like iron, coal, oil, etc. The
future generation thus stands at a disadvantage.
• (ii) Effect on Domestic Industries: If no restrictions are placed on the foreign
trade, it may ruin the domestic industries and cause widespread distress among
the people.
• (iii) Effect on Consumption Habits: Sometimes it so happens that the traders in
order to make profits import commodities which are very harmful and injurious to
the people For instance, if opium, wine, etc., are imported, it will adversely affect
the health and morale of the people.
• (iv) Times of Emergency: If each country specializes in the production of those
commodities in which it has comparative advantage over other countries, it may
prove very dangerous rather fatal during times of emergency like war. The
country may not be able to get essential supplies Thus the whole economy may
be crippled.
• (v) Provides Foothold to the Foreigners: Foreign trade provides foothold to the
foreigners in the country. It is in fact a pretext for a thorough political and
economic subjugation of the weak by the powerful country
• We cannot deny this fact that international trade has certain evil
consequences but if it is properly controlled, it can prove very beneficial for all
the countries of the world.

Trade Balance and the National Income

Accounting
• The general opinion is that an excess of imports over exports, a trade deficit, is
bad for an economy while an excess of exports over imports is considered to be
good economic news.
• However, to clarify the role of imports and exports in an economy, it is better to
examine the interactions among the components of GDP.
• Since the balance of payments is an important component of GDP the BOP
(business owner policy) is also important of interest of business people and policy
makers.
• For business people trying to keep track of the performance of the economies in
which they do business, information on BOP and its components is important.

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