International trade is trade between two countries. It involves the physical movement of goods and services from one country to another. International trade consists of import trade and export trade..Import is buying of goods from someone outside the country. Goods entering the country from another country are called imports. Goods sold outside the country are called exports.
International trade gives countries the opportunities to specialise in the things they do best.
Specialisation means concentration on particular tasks or products. A country specialise on particular product on the basis of its comparative advantage or absolute advantage.
(Q. Explain what is meant by specialisation and in what circumstances it might occur.)
Absolute advantage means, a country is more efficient than the other country in producing a product using fewer resources. For example country A can produce 10 tractors or 30 computers using some resources. Country B can produce 5 tractors or 50 computers using the same resources. Country A has absolute advantage in producing tractors and country B has absolute advantage in producing computers.
Each country has a comparative advantage:-In this case one country is more efficient than the other in the production of both commodities. It is assumed that country ‘A’ is more efficient over country ‘B’ in both industries. Even in this situation, which is thought to explain a large part of international trade, both countries can benefits from specialisation and trade providing each country has comparative cost advantage. So even though some countries could produce them because they import goods at a cheaper price
(A can produce both goods more efficiently than country B. It has an absolute advantage in both industries. Whether both countries can benefit from specialising and trading depends upon the opportunity costs of producing tractor and camera in each country. Ability of a country to produce a product at lower opportunity cost than other countries regions is called comparative advantage.)
Q. Discuss whether it is better of a country to produce many products and protects its markets from international trade or whether it is better to try to achieve specialisation in some products only.
Q.Explain why specialisation in international trade might benefit a country
An: It is better a country to specialise some products on the basis of its comparative advantage or absolute advantage. It will able to produce a large quantity of output at lower cost. The country can get gain from international trade by exporting specialised goods and import some other goods it does not produce itself. As a result country could consume a greater variety of goods.
As opposed to this, it better for a country to diversify its production as this will help increase in GDP as well as reduce the country’s dependence on other countries. A country should be sufficient for their staple food items like wheat, rice maize etc. It is also better for a country to protect its market from international competition. This is particularly true in the case of infant industries. Protection could enable such industries to grow, achieve economies of scale and became internationally competitive. However, there is great risk in this era of globalisation and great economic integration both economically as well as politically to remain isolated by protecting its markets. Therefore, it is better for a country to try to achieve specialisation and engage in international trade as this will help the country exploit its comparative advantage and benefit from a greater variety of goods and services.
Advantages international trade or Gains from international trade
The advantages of international trade are
Better utilisation of recourses:-International trade helps countries to utilise their economic recourses fully, because by doing so they can supply their surplus products to foreign countries.
Benefits of specialisation:-Under specialisation, goods are produced on a very large scale. This helps in reducing cost of production and improving quality.
Helps in raising standard of living of people: International trade enables people to enjoy a large variety of commodities produced in other countries, which helps in raising the standard of living of the people of the trading countries
Availability of scarce recourses: Through international trade, a country can obtain scarce materials from other countries. This helps the country in its industrial and economic development
In addition to the above benefits, some other important gains are the following
- It will help the country in its agricultural development
- Equalisation of prices of commodities
- Prevention of monopolies
- Promote international cooperation
- Developing countries gain from foreign technical know-how and foreign capital
- Facilities of transfer payments
Disadvantages of International Trade
The disadvantages of international trade are:-
- It drains of natural recourses
- Country may suffer during war time
- It spreads the economic disturbance
- It makes domestic industry suffer
- It creates completion and rivalry
- It gives room for dumping: – Dumping is a trade practice when a foreign firm sells products in the domestic market at a price below their cost of production.
Methods of restricting imports or Trade protection Methods
- Tariffs:-These are taxes placed on imports. Tariffs are used to protect domestic industries from foreign competition and to raise revenue for the government.
- Quotas:-quotas place an upper limit on the quantity of foreign goods entering a country. These are the limitation of foreign goods imported to a country. For example a country may limit the imports of foreign cars 40000 each year.
- Subsidies:-By subsidising home producers, a government can reduce the prices of goods made by domestic firms. Subsidies, therefore, help to protect home producers from foreign competition
- Exchange control:-imports can only be purchased with foreign currency. The government can limit imports, therefore, by restricting the amount of foreign currency available to firms wishing to import goods.
- Embargo:- This is the most extreme form of quota since it place a physical limit on imports of zero. In other words it is a complete ban. It may be placed on imports from particular countries or on imports of certain countries
Counties should use trade protection to protect infant industries from foreign competition. A country also use protection in the case of strategic industries like staple crops, defence etc. Moreover, protection from foreign completion might also be used to prevent domestic unemployment arising due to the decline of domestic industries.
Besides these, countries use trade protection to improve their balance of payments deficit.
However, trade protection has high risk; if other countries are doing the same things it will reduce the not only import but also exports. The use of trade barriers discourages competition, resulting higher prices, lower output, lower quality of output etc.
(Q. some countries use protective measures in international trade. Describe to types of protection a government can use in international trade.
Q. Describe what methods might be used to protect industries from foreign competition in international trade.
Q. Discuss whether countries should use trade protection)
Free trade means there has no restriction of international trade. It means people and firms can sell and buy goods and services with rest of the world without any tariffs and quota. It allows countries to specialise in goods and services they are best able to produce on the basis of comparative advantage. This is likely to result in efficient allocation of world recourses; it leads to increase employment, income and living standards. Selling freely to global market should enable a firm to take greater advantages of economies of scale. This will reduces price of goods and services. And also greater choice of variety of goods and services .However, it might be justified to use some form of protection in certain situations. For example in the case of infant industries, they must need the protection from foreign competition otherwise they can’t survive in the market. A country also use protection in the case of strategic industries like staple crops, defence etc. Moreover, protection from foreign completion might also be used to prevent domestic unemployment arising due to the decline of domestic industries.
(Q, Discuss whether it is better for a country to engage in free trade or to use some form of protection from foreign competition.
Q. Analyse the advantages of trading without tariffs and quotas.)
A trade agreement between two or more countries involves either a restriction of trade with some countries or preferential treatment with some nations. For examples, free trade area and customs union
Free Trade and Customs Unions
Free trade areas consist of groups of countries which have abolished tariffs and quotas on trade between themselves. Each of the member countries, however, maintains its own independent and different restrictions on imports from non-member countries. Example EFTA
Customs unions are formed by a group of countries. There is a free trade between countries (i.e. remove the trade restrictions) but all members are agreed to follow a common external tariff on imports from the rest of the world .Example EEC
Dumping Selling goods in a foreign market at lower prices than those charged in the home market it is called dumping.
This refers to the ability of a country (or Firm) to provide goods and services which provide better value than their overseas rivals.
International competitiveness depends on
- Sate of technology
- Quality of the product
- Average cost
- Investment in capital equipment
- Research and development and innovation
- Exchange rate
Natural recourses and international trade
Natural recourses are free gift of nature .It is described as land .It is used as a factor of production to produce goods and services. Examples of natural recourses are coal, oil, forest, minerals etc. A natural recourses is a productive and valuable assets for a country. It is wise for a country to exploit its natural recourses to increase its productive capacity and stimulate economic growth. The exploitation of natural recourses increases employment opportunity in primary and secondary sectors. This will help to boost national income and living standard of a country. The country can export its natural recourses to other countries and reap gains from international trade.
However, it will be unwise to exploit the recourses too much without the consideration of future generation because most of the natural recourses are non-renewable recourses. The depletion of the recourses will result in loss of all possible gains in terms of growth, employment and trade. Therefore, it is wise to strike a balance between exploitation and conservation by policy of sustainable growth so that benefits are maximised by ensuring the sustainability of recourses in the long run.
(Q.Explain with the use of one example what is meant by natural recourses of a country?
Q.For many countries international trade involves using their natural resources are selling them to other countries, Discuss whether it is wise for a country to exploit its natural resources rather than to conserve them.)