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TOPIC 6: INTERNATIONAL TRADE
International Trade
The Meaning of International Trade
Explain the meaning of international trade
International trade, economic transactions that are made between countries. Among the items commonly traded are consumer goods, such as television sets and clothing; capital goods, such as machinery; and raw materials and food. Other transactions involve services, such as travel services and payments for foreign patents (see service industry). International trade transactions are facilitated by international financial payments, in which the private banking system and the central banks of the trading nations play important roles.
International trade and the accompanying financial transactions are generally conducted for the purpose of providing a nation with commodities it lacks in exchange for those that it produces in abundance; such transactions, functioning with other economic policies, tend to improve a nation’s standard of living. Much of the modern history of international relations concerns efforts to promote freer trade between nations.
This article provides a historical overview of the structure of international trade and of the leading institutions that were developed to promote such trade.
How International Trade Arises
Point out how international trade arises
REASONS FOR INTERNATIONAL TRADE
- 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).
- 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).
- 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.
- 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
- Existence of GovernmentPolicies; 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.
The Advantages and Disadvantages of International Trade
Mention the advantages and disadvantages of international trade
ADVANTAGES OF INTERNATIONAL TRADE
- It encourages specialization: international trade enables countries to specialize in production of goods in which they have comparative advantages.
- technological transfer; international trade can facilitate the transfer of technology from one country to another country.
- It reduce scarcity of goods
- it stimulates international understanding.
- it is important during calamities; international trade enables a country to obtain various necessities during calamities such as floods and drought.
DISADVANTAGES OF INTERNATIONAL TRADE.
- Decline of domestic industries: international trade obliges local firms to enter into competitions with foreign giant firms which use more efficient techniques of production.
- Some of the imports are harmful to the citizen.
- Dependency: international trade influences specialization among countries. Too much specialization may be dangerous to a country since it makes a country dependent on other countries for the supply of essential goods. This causes difficulties to a country when it faces problems of foreign currency in which it can fail to import essential goods, dependency may also be a source of new colonialism.
- Problem of unequal exchange. Most of time less developed countries is facing unfavorable terms of trade because they export primary products which have low price elasticity and import manufactured goods which have high price elasticity.
Difference between Visible from Invisible Trade
Differentiate visible from invisible trade
VISIBLE TRADE; is a trade on physical goods that can be touched and seen such as television, radio, cloth, food etc
INVISIBLE TRADE; Is a trade on invisible items. It consists of services which cannot be seen, touched or counted.
Difference between Balance of Trade and Payments
Distinguish between balance of trade and balance of payments
BALANCE OF TRADE; this is the difference between the value of exports of goods and the value of import of goods.
BALANCE OF PAYMENT; can be defined as the difference between the receipts of a country frim abroad and the payment of a country abroad.
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