INTERNATIONAL TRADE

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.