International Trade

An Introduction
By, Carol Peters Prabhu

Learning Objectives
Definition of Domestic and International Trade Features of International Trade Advantages and Disadvantages of International Trade Importance of International Trade

Trade Exchange of Goods and Services Domestic Trade Trade among parties in the same country. Also termed as Internal Trade International Trade/ Foreign Trade Trade among parties residing in different countries along international borders Purchase or sale of goods/services, borrowing or lending capital and transfer of technical services among countries constitute IT

Definition of Regional Trade [IT]Trade among parties in the same country but residing in different parts or states is referred as inter regional or also as internal trade.
Some economists like Ohlin or Haberler holdthe view that there is no fundamental difference between inter regional and international trade.

But classical economists Smith and Ricardo find fundamental differences are there &have developed theory of comparative [cost]advantage to explain them.

Features of International Trade

1. Immobility of factors of Production: Within a country labour and capital moves freely to get maximum returns. These factors of production do not move with such freedom among different countries due to new culture, climate, language, customs and political restrictions imposed by the states. This immobility gives rise to wage and interest rate differentials among countries.

2. Difference in Natural Resources Different countries endowed with different Natural Resources e.g. India and China - Rich in Minerals and Forests - Labour Gulf Countries Oil Scarce Labour Germany Ageing population India Youngisthan

3. Geographical and Climatic Differences Climatic factors Like rain and tropical weather good for agriculture
Hilly regions cultivation of Coffee and Tea e.g. Brazil and India

Geographical Advantages help countries to specialize and reduce the cost of production e.g. Some commodities are best produced in colder climates e.g. electronics and strawberries

4. Difference in Market Conditions e.g. Language, Customs, Usage, habits , tastes and fashion differ weights and measures e.g. right hand driven cars and left hand cars England and USA Internal Trade these differences do not matter can produce same type of goods

5. Different Currency Monetary System

A trader can transact in Rupees while trading in India, he has to transact in Dollars, Pounds, Euros or Yen while trading with USA, UK, Europe and Japan respectively. This introduces additional cost & risk in international trade as the value of currencies is subject to variations. Some currencies are easily convertible into others, but not all. e.g. Foreign Exchange Rules In India FEMA Act

6. Higher Transfer Costs Because of the long distances involved transport costs for international transactions are higher than for domestic trades
e.g. Pakistan and India cannot trade freely across borders Shipping of Goods through sea routes long and affected by perils of sea, Air routes Expensive

High transport costs sometimes discourages IT

7. Different Political Systems

In domestic trade parties carry transactions with due regard to national interests. Such loyalty is absent in international trade as each party aims at maximum gain for itself

8. Different Trade Policies In terms of commerce, taxation, export/import tariffs there is a single policy governing transactions under domestic trade This is not the case with international trade Parties have to study and adopt policies of both the countries involved in the trade
e.g. Some goods cannot be traded freely restrictions apply in case of chemicals, food items, drugs etc.

9. Problem of Balance of Payments: Arises when imports are more than exports Happens mainly to underdeveloped and developing countries This can lead to economic crisis
e.g. India at 1991 BOPs crisis which led to structural adjustments

Leads to heavy borrowing of funds to pay for imports

Unfavorable BOPs depletes Foreign Exchange