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 know-hows, 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.