INTERNATIONAL TRADE
International trade refers to the exchange of goods and services between countries.
Why do countries trade? / Reasons for international trade
To get the goods that they cannot produce themselves
To get the goods and services at a cheaper price
To get more varieties of products
To get large market and enable them to obtain economies of scale.
Theories of International trade
Absolute advantage
If a country can produce a commodity at lower cost or by using less amount of resources.
Comparative advantage
If a country can produce a commodity at lower opportunity cost.
Free Trade
Exchange of goods and services between the countries without any restriction.
Advantages of free trade
Consumer can get more choice: free trade provides a greater variety of goods to consumers
Consumer can buy goods cheaply
Producers will be more efficient by competition with foreign firms
World trade will increase
Countries can specialize according to their comparative advantage
It facilitates socio- cultural exchange between countries.
It helps in improving standard of living.
Disadvantages of free trade
Infant industries will not be protected
It will create balance of payment problems.
It will leads to dumping
Strategic and declining industries will not be protected
It will cause to unhealthy competition.
Protectionism
Protectionism means protecting the country by using trade barriers.
Methods to protect the country/ Protective measures
Tariff: Tax imposed on imports. It will raise revenue for the government. It will raise the price
of foreign goods and there by protecting home industries from foreign competition.
Quotas: These are limits on the quantity of a product that can be imported to a country.
Exchange Control: Limiting the amount of foreign currency available.
Subsidies: It is a grant given by the government to home producers for producing goods at a
cheaper price.
Embargoes: Complete ban on import of certain goods to a country.
Red tape: Deliberate use of rules and regulations to prevent import.
Advantages of protectionism
Infant industries will be protected: The newly started industries will be protected from foreign competition.
Solving the balance of payment problem: BOP deficits problems will be solved by reducing imports
Prevent dumping: Selling goods at a lower price in foreign market can be prevented
Protecting the Strategic Industries: The necessary goods producing industries will be protected.
Protecting the declining Industries: Declining industries protected from further structural unemployment.
Increase in employment: It will create more job opportunities in the country
Increase in government revenue : Imposition of tariff will raise government revenue.
Disadvantages of protectionism
Consumer cannot get goods cheaply
Consumers have less choice
Producers may not be efficient.
World trade will decrease
Low standard of living.
Terms of Trade
The rate at which exports are exchanged for imports.
Favourable terms of trade: export price is more than import price.
Unfavourable terms of trade: import price is more than export price.
Balance of Trade/Visible Balance
It is the difference between the value of visible exports and the value of visible imports.
International trade refers to the exchange of goods and services between countries.
Why do countries trade? / Reasons for international trade
To get the goods that they cannot produce themselves
To get the goods and services at a cheaper price
To get more varieties of products
To get large market and enable them to obtain economies of scale.
Theories of International trade
Absolute advantage
If a country can produce a commodity at lower cost or by using less amount of resources.
Comparative advantage
If a country can produce a commodity at lower opportunity cost.
Free Trade
Exchange of goods and services between the countries without any restriction.
Advantages of free trade
Consumer can get more choice: free trade provides a greater variety of goods to consumers
Consumer can buy goods cheaply
Producers will be more efficient by competition with foreign firms
World trade will increase
Countries can specialize according to their comparative advantage
It facilitates socio- cultural exchange between countries.
It helps in improving standard of living.
Disadvantages of free trade
Infant industries will not be protected
It will create balance of payment problems.
It will leads to dumping
Strategic and declining industries will not be protected
It will cause to unhealthy competition.
Protectionism
Protectionism means protecting the country by using trade barriers.
Methods to protect the country/ Protective measures
Tariff: Tax imposed on imports. It will raise revenue for the government. It will raise the price
of foreign goods and there by protecting home industries from foreign competition.
Quotas: These are limits on the quantity of a product that can be imported to a country.
Exchange Control: Limiting the amount of foreign currency available.
Subsidies: It is a grant given by the government to home producers for producing goods at a
cheaper price.
Embargoes: Complete ban on import of certain goods to a country.
Red tape: Deliberate use of rules and regulations to prevent import.
Advantages of protectionism
Infant industries will be protected: The newly started industries will be protected from foreign competition.
Solving the balance of payment problem: BOP deficits problems will be solved by reducing imports
Prevent dumping: Selling goods at a lower price in foreign market can be prevented
Protecting the Strategic Industries: The necessary goods producing industries will be protected.
Protecting the declining Industries: Declining industries protected from further structural unemployment.
Increase in employment: It will create more job opportunities in the country
Increase in government revenue : Imposition of tariff will raise government revenue.
Disadvantages of protectionism
Consumer cannot get goods cheaply
Consumers have less choice
Producers may not be efficient.
World trade will decrease
Low standard of living.
Terms of Trade
The rate at which exports are exchanged for imports.
Favourable terms of trade: export price is more than import price.
Unfavourable terms of trade: import price is more than export price.
Balance of Trade/Visible Balance
It is the difference between the value of visible exports and the value of visible imports.
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