Why international trade is important

Why international trade is important

Introduction;

International trade is an activity of strategies importance in the development process of a developing economy. In the modern world no country is completely self-sufficient. Self -sufficiency, in the sense used here, means the proportion of the goods and services consumed to their total output produced with in a country.

International trade is the backbone of our modern, commercial world, and there are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes.

Defining international trade;

“The term 'trade' refer to exchange of goods and services. When trade takes place across the country, it's international trade.”

“The buying and selling of goods and services across national borders is known as international trade” (www.moneyinstructor.com)

“International trade is the exchange of services, goods, and capital among various countries and regions, without much hindrance.”( www.economywatch.com)

Explanation;

International trade has flourished over the years due to the many benefits it has offered to different countries across the globe. International trade among different countries is not a new a concept. History suggests that in the past there where several instances of international trade. Traders used to transport silk, and spices through the Silk Route in the 14th and 15th century.

The extension of foreign trade, according to Ricardo “will very powerfully contribute to increase the mass of commodities, and therefore, the sum of enjoyments”. This will be true for each trading nation. In modern terminology, “trade is a positive sum game”.

The Need of International Trade:

There is always a need for because the countries have different capabilities and they specialize in producing different things. To compensate for what they don’t produce, then have to involve trade with other countries.

The importance of international trade;

One fundamental principle international trade is that one should buy and services from a country which has the lowest price and sell his goods and services to a country which has the highest price. This is good for buyers and sellers and also the developed countries. International Trade is that kind of trade that give s rise to the economy of the world.

International trading lets the developed countries use their resources effectively like technology, capital and labour. As many of the countries are gifted with natural resources and different assets (labour, technology, land and capital) they can produce many products more efficiently. Sell at cheaper prices than other countries. A country can obtain an item from another country if it can’t effectively produce it within the national boundaries. This is the specialty of international trade.

The benefits of international trade have been the major drivers of growth for the last half of the 20th century. Nations with strong international trade have become prosperous and have the power to control the world economy.

David Ricardo, a classical economist, in his principle of comparative advantage explained how trade can benefit all parties such as individuals, companies, and countries involved in it, as long as goods are produced with different relative costs. The net benefits from such activity are called gains from trade. This is one of the most important concepts in international trade.

Adam Smith, another classical economist, with the use of principle of absolute advantage demonstrated that a country could benefit from trade, if it has the least absolute cost of production of goods, i.e. per unit input yields a higher volume of output.

Some important benefits of International Trade

• Enhances the domestic competitiveness
• Takes advantage of international trade technology
• Increase sales and profits
• Extend sales potential of the existing products
• Maintain cost competitiveness in your domestic market
• Enhance potential for expansion of your business
• Gains a global market share
• Reduce dependence on existing markets
• Stabilize seasonal market fluctuations

Here are some Importance of International Trade :

1) International Trade enables the fuller utilization of resources. Underdeveloped countries are not in a position to use their mineral resources, so they export their raw materials to developed countries where the same are needed the most.

2) Because of International Trade the trading partners gets goods cheaper than otherwise. Because every country produce those goods in the production of which it has to occur less comparative cost.

3) By virtue of International Trade consumers gets an opportunity to consume a large variety of goods produced by different countries. This improves the quality of life.

4) International trade enables every country to dispose off their surplus production. Some countries produce more than their own requirement. They sell this surplus production in other countries and avoid the occurrence of deflationary pressures in the domestic economy.

5) International Trade encourages countries to compete with each other in the production of different kinds of goods at low cost of production. Competitiveness stimulates productivity.

6) It widens the extent of market. Every country makes an attempt to produce different goods in large quantity. This induces production on large scale and thereby generates economies of scale.

7) International Trade stimulates the spirit of competition among the entrepreneurs. Novel techniques of production are devised to produce quality goods at low cost. Advancement of technology is the key to economic development.

8) International Trade promotes mutual cooperation among different countries. It creates an atmosphere of goodwill and friendship among the trading countries.

International Trade has positively influenced the economic growth of a country in the

following ways:

·

International trade injects global competitiveness and hence the domestic business units tend to become very efficient being exposed international competition. Due to the integration with the world economy the entrepreneurs can have easy access to the technological innovations. They can utilize the latest technologies to enhance their productivity.

·

The developing countries have higher trade protectionism measures as compared to the developed countries. The countries that have adopted such measures are seen to reap the benefits of an open trade regime.

·

The products that are labour intensive like clothing, footwear, textiles etc are exported by the developing countries to both developed and underdeveloped countries. Such exports earn heavy tax revenue in countries like Mexico, India, China and many more.

·

International Trade has also brought in a reduction in the poverty level. India was a closed economy in the 1960s and 70s. There was not even 1% decline in the poverty level. The entire scenario changed with globalization and international trade. According to Prof. Jagadish Bhagwati the reduction in the poverty level is due to a pull up rather than a trickledown effect. The economic growth brought about by international trade can generate financial resources. Such resources can be used to set up anti poverty programs. Better education and health facilities can also be provided to the poor.

·

The exclusion of all types of trade barriers in the agricultural products of the developed countries will lead to a decline and rise in production and world prices.