Download International trade and exchange

International trade and exchange
 Trade existed since time immemorial, in one way
or the other. Trade facilitated not only exchange
of goods but also led to the spread of language, art
culture, customs, race, goods and services. It
catalysed socio-economic development among the
partners of the trade.
 Trade that occurs within the borders of a country
is called domestic trade. Trade that occurs
between two or more countries is called
international trade.
Principle of comparative cost
 According to the comparative cost theory of
international trade, “in a two country and two
commodity model, if one country has absolute cost
advantage in the production of both the commodities
then it should specialise in the production of that
commodity in which it has greater comparative cost
advantage and the other country having absolute cost
disadvantage in the production of both the commodities
should specialise in the production of that commodity
in which it has lesser comparative cost disadvantage.
 This comparative cost theory of international trade is
widely accepted as it explains the trade realistically.
Gains from international trade
 International trade provides many benefits which are
called gains from international trade. Several benefits
accrue to a country when it trades with foreign
countries.
 Its national income, level of output and growth rate of
economy register an increase which would eventually
lead to poverty alleviation and economic development.
 Foreign trade widens market for various goods and
services and therefore encourages investment in
production, increased income and concomitant savings.
Employment opportunities are generated
rapidly. When the export of farm products are
beneficial to a country, and when it undertakes
the export, the farmers are also benefited.
They could produce more to cash in on
widened marketing prospects. Their standard
of living would also improve.
Foreign trade makes available foreign knowhows, facilitates capital flow to the exporting
country and encourages efficiency and
excellence in production. Also, several indirect
benefits accrue in international trade.
The other important gains are given below:
(a) Expansion of market
International trade facilities exchange of
marketable surplus with countries where
demand exists. It may also be more profitable
to export when the price offered in the
international market is higher than that of
domestic market. Frozen shrimps, for example,
are fully exported from country as it fetches a
high price in overseas markets.
(b) High level of consumption
When an economy is involved in international trade it is
called an open economy and when it does not trade
with other countries it is known as a closed economy.
The absence of international trade is called autarky.
When international trade for a good exists, then,
production of that commodity is high as it will be
more than the demand in the domestic market. High
demand with enough purchase power and willingness
to buy leads to a high level of consumption across the
world.
(c) High economic growth
International trade provides many gains and acts an
engine of economic growth. When a country is
immensely benefitted from international trade, its
economic growth becomes rapid. In the early
period foreign aid was considered essential to
develop an under-developed economy. Now,
international trade is considered as a potential
source of economic growth which is the primary
objective of developed countries.
Foreign enables economic development by
making available the following factors:
i) capital through international investment,
ii) means of development in the form of raw
materials, goods and machinery and
iii) technical know-how
 Apart from these important factors for economic
development, exports constitute the key factor in
deciding the sustained rate of economic growth.
Countries have to create export surplus by
specialising factor endowments and producing on
a large scale with minimum cost.
 Further, export industries stimulate home
industries and increase their productivity. Thus,
international trade causes high economic growth
and development.
(d) Factor prices equilibrium
In domestic trade the factor prices vary but international
trade helps to optimise production since there is no
restriction on marketing through efficient resource
use. When modern technology is adopted, output is
more and unless it is consumed, optimal production
may not be possible. In international trade, it is
possible to use the resources efficiently and in such
cases production may take place where it is cheap to
produce from where it may be marketed worldwide.
Balance of payment
 If a country exports more than what it imports
then it is said to have favourable balance of trade.
 If the foreign exchange earned by a country
through exports is more than what it requires to
pay for various purposes including imports, then,
the country is said to be having a favourable
balance of payment (BOP).
 When the opposite happens, the country would
not be able to pay for its imports and would slid
into what is called the balance of payment crisis.
 It may then have to raise the required foreign
exchange through other sources like loans which may
bring economic hardships and other associated
problems.
 When a country suffers from the balance of payment
crisis over a protracted period, it may have to take
loans from potential sources and consequently debt
servicing may emerge as a burden.
 Therefore, export development is accorded top
priority by all countries.