INTERNATIONAL

TRADE
APPLIED ECONOMICS
 WHAT IS INTERNATIONAL TRADE?
International trade is the exchange of goods and
services between countries.
International trade is the exchange of goods and
services between countries. This type of trade gives rise
to a world economy, in which prices,
or supply and demand, affect and are affected by
global events.
Total trade equals exports plus imports. In 2017,
world trade was $34 trillion. That's $17 trillion in
exports plus $17 trillion in imports.
Foreign trade, also referred to as International
Trade, is the exchange of capital, goods, and
services between two or more countries.
Foreign trade arises from the fact that no
country is self-sufficient in term of producing all
the goods and services that it requires. Countries
have to buy from other countries what they
cannot produce or can produce less than the
requirements. Similarly, a country sells to other
countries the goods and services which it has in
surplus.
One-quarter of the goods traded was in machines and
technology.
 This includes electrical machinery, computers, nuclear
reactor, boilers, and scientific and precision
instruments.
Automobiles, including cars, trucks, and buses
contributed 9 percent. Mineral fuels like oil, gas, coal
and refined products accounted for 14.4 percent.
Commodities like plastics, iron, organic chemicals,
pharmaceuticals, and diamonds added up to 13.2
percent.
 Top Commodities Traded in 2017
Other category includes iron and steel (2.7%), organic chemicals
(2.6%), pharmaceutical products (2.6%), and diamonds, pearls,
and precious stones (1.9%).
In 2017, global trade grew 10.5 percent. In 2016, it had
contracted 4 percent. It had grown 2 percent in 2015
and 3.4 percent in 2014. It's returning to the average
annual 10 percent growth rate that occurred between
1961 and 2013.
International trade contributes about 27 percent of the
global economy. Until the 2008 financial crisis, world
trade grew 1.9 times faster than economic growth. Until
2017, trade grew more slowly than the global economy.
 Advantages of International Trade

Exports create jobs and boost economic

growth. They give domestic companies more
experience in producing for foreign markets.
Over time, companies gain a competitive
advantage in global trade. Trade also makes
companies more efficient. Research shows
that exporters are more productive than
companies that focus on domestic trade.
Comparative Advantage: trade encourages a nation
to specialize in producing or supplying only those
goods and services which it can deliver more
effectively and at the best price, after taking into
account opportunity cost.
Economies of Scale: if you sell your goods globally, you
will have to produce more than if you sold just
domestically. Producing in higher volumes provides
greater economies of scale. In other words, the cost of
producing each item is lower.
Competition: international trade boosts competition.
This, in turn, is good for prices and quality. If suppliers
have to compete more, they will work harder to sell at
the lowest price and best quality possible. Consumers
Transfer of Technology: increases thanks to
international trade. Transfer of technology
goes from the originator to a secondary user.
In fact, that secondary user is often a
developing nation.
Jobs: great trading nations such as Japan,
Germany, the UK, the USA, and South Korea
have one thing in common. They have much
lower levels of unemployment
than protectionist countries.
 Disadvantages of International Trade

The only way to boost exports is to make trade

easier overall. Governments do this by reducing
tariffs and other blocks to imports. That reduces
jobs in domestic industries that can't compete on
a global scale. It also leads to job outsourcing.
That's when companies relocate call centers,
technology offices, and manufacturing. They
choose countries with a lower cost of living.
Over-Specialization: employees might lose their
jobs in large numbers if global demand for a
product declines.
New Companies: find it much harder to grow if
they have to compete against giant foreign
firms.
National Security: if a country is totally
dependent on imports for strategic industries, it is
at risk of being held to ransom by the exporter(s).
Strategic industries include food, energy and
military equipment.
 Types of Foreign Trade
International trade consists of ‘export trade’ and
‘import trade’. Export trade involves sale of goods
and services to other countries. Import trade
involves purchasing of goods and services from
other countries.
Bilateral trade: This is a trade agreement in which
two countries exchange goods and services.
Multilateral trade: This is the type of international
trade where a country trade with two or more
countries.
 Division of Foreign Trade
Import Trade: Import trade refers to purchase of goods by
one country from another country or inflow of goods and
services from foreign country to home country.
Export Trade: Export trade refers to the sale of goods by
one country to another country or outflow of goods from
home country to foreign country.
Entrepot Trade: Entrepot trade is also known as Re-export.
It refers to purchase of goods from one country and then
selling them to another country after some processing
operations.
 Reasons for International Trade/Foreign
Trade
Uneven distribution of natural resources:
Expansion of market for products: Foreign trade is necessary as
it helps to widen the market for goods produced.
Difference in taste
Difference in technology
Difference in skills
Difference in climatic condition
Desire to improve the standard of living
Difference in efficient use of natural resources
 Barriers to International Trade/Foreign
Difference in currency Trade
Difference in culture and beliefs
Difference in language
Distance
Political instability
Problem of documentation
Transportation and communication
Government policy
Difference in legal system/ emigration laws
Difference in weights and measurement