INTRODUCTION TO INTERNATIONAL TRADE

International trade
Definition
Refers to the process of buying and selling of physical (real) goods
(commodities) and services across national boundaries.
Or
Is just an exchange of goods and services among countries worldwide
Or
Is about the way in which businesses located in different countries trade
with one another. It provide importation and exportation
Or
Is the movement of physical goods, services and capital across nation’s
boundaries around the world
Or
Refers to the exchange of goods and services between residents of one
country and the rest of the world. In that case international trade embraces
imports and exports between countries
Or
International trade, consists of goods and services moving in two
directions, import 9flowing into a country from abroad) and export (flowing
out to other countries)

NOTE;
The major parties involved in international trade are exporters and
importers

PARTIES OF INTERNATIONAL TRADE

• Basically there are two major parties to an international trade
a) The seller ( exporter)
b) The buyer (importer)
• Banks are not parties to international trade transactions but they play an
important role in facilitating payment
• The countries of the exporter and the importer also play a vital role in
international trade. These are where the importer and the exporter

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 operate hence rules and regulations of the respective countries have to
be applied and compiled with.

Why international trade?

• A country may import goods from other countries and export other
goods to other countries, this is because it cannot satisfy all its
requirements from the limited home production possibility
• There are various reasons that give rise to the buyers and sellers entering
into contract of sale internationally
i. Demand and supply of certain goods and services
ii. Different in technology levels
iii. Comparative price advantage
iv. Quest for external market to accommodate surplus demand in
one country
v. Geographical reasons that give rise to climate differentials
• Hence all countries need international trade for various reasons much
more as an extension of territorial specialization that is based on
a) Comparative advantage
This refers to an ability of the country to produce at a less cost
than the other.
▪ It is when a country produces goods or services for a lower
than other countries.
▪ Thus country has to specialize in producing (output) of
those goods and services which have a comparative
advantage in production
▪ A country can have both absolute advantage and
comparative advantage

b) Absolute advantage
Is when a producer can producer can produce a good or service
in greater quantity for the same cost, or the same quantity at a
lower cost than other producers
• A country can have an absolute advantage due to the following
i. Uneven distribution of natural resources
ii. Difference in climate

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 iii. Expertise in different technology (difference in human
skills and production.

REASONS FOR GOING INTERNATIONAL

a) Differences in demand
Demand or preferences for goods and services of people in different
countries is not the same

b) Conducive climate
Some countries do have more conducive climate for the production of
certain type of goods / raw materials than others

c) Differences in technology
Countries have different technology abilities in producing goods and
services
Technology
Refers to the techniques used in turning resources into output

d) Existence of government policies

Government tax and subsidy programs can be sufficient to generate
advantage in production of certain goods

e) Differences in resources endowments

Resources endowment refers to the skills and abilities of a country’s
workforce, natural resources available and sophistication of its capita
stock (machinery, infrastructure, communication systems)
• To open new markets to sell its products; the quest for external
market to accommodate surplus demand in one country.

INTERNATIONAL TRADE Vs DOMESTIC TRADE

Domestic trade
Characteristics of domestic trade
a) Common language and culture
b) Same laws
c) Absence of customs formalities
d) Relatively simple documentation

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 e) Single currency
f) Simple transportation

International trade
Characteristics of international trade
a) Vigorous marketing efforts
b) Copying with customs formalities
c) Dealing with different legal requirements
d) Dealing with multiple currencies
e) Buyer defaults overseas (unknown)
f) Government actions
g) Complex transport arrangement

EXPORT AND IMPORT TRADE

Generally international trade is divided into two,
a) Import trade
b) Export trade

Exportation
Refers to the sale of goods and services to a foreign country.
An export
Is any good or commodity transported from one country to another
country
• Export goods or services are provided to foreign consumers by
domestic producers

Importation
Is to bring or carry in (goods or materials) from an outside source (from a
foreign country) for sale or trade
• It is just a process of bringing in (goods/commodities) from another
country (foreign) to a domestic country.

DETERMINANTS OF IMPORT – EXPORT

Why do some countries export or import more than others?
There are fact that implement export/import ; these includes
In export

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 a) The trade and exchange rate regime; import tariffs, quotes, exchange
rates
b) Presence of an entrepreneurial class within the country
c) Government policy (development oriented economic policy)
d) Secure access to transport and marketing

In import
a) High per capital income
b) Price of imports
c) Government restrictions on imports, policies of devaluation and
increase in tariffs
d) Availability of foreign exchange

ADVANTAGES OF INTERNATIONAL TRADE

a) It enables a resident of one country to get what he/she could not
produce
b) Provide a resident with more variety of goods hence improving the
living of standard of the people
c) Enhance the domestic competitiveness
d) Takes advantage of international trade through the exchange of
technology between the trading countries
e) Enables countries to specialize in areas or field they have greatest
advantages over others
f) It generate foreign exchange for a country
g) Extend sales potential for domestic existing products and business
expansion
h) Gain global market share hence produce dependence on existing
domestic markets
i) Stabilize seasonal market fluctuations
j) Facilitates goods and services to be produced at lower costs
k) Efficient allocation and better utilization of resources
l) Promotes allocation and better utilization of resources
m) Promotes efficiency in production hence employment generations

DISADVANTAGES OF INTERNATIONAL TRADE

a) It increase dependence on other countries

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 b) Imported gods from industrialized countries often pose a competition
threat on local industries
c) Importing country may be turned into dumping ground of goods
which are of poor quality
d) Exhaustions of natural resources
e) It can create unemployment
f) Some countries are exploited and their domestic production
decreases because foreign countries take over the business in local
countries

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