What is International Trade?

Definition: International trade is a set of actions that aim to exchange capital, goods, and services
between foreign countries across their international borders.

What Does International Trade Mean?

What is the definition of international trade? International trade allows firms to compete in the
global market and to employ competitive pricing for their products and services. As more
products become available to the market, consumers meet their needs and satisfy their wants,
thus increasing customer satisfaction.
Moreover, the exchange of goods and services on a global level has a significant impact on a
national economy as exports grow, thus increasing the balance of international payments and
significantly contributing to a country’s gross domestic product (GDP).

International trade, economic transactions that are made between countries. Among the items
commonly traded are consumer goods, such as television sets and clothing; capital goods, such
as machinery; and raw materials and food. Other transactions involve services, such as travel
services and payments for foreign patents (see service industry). International trade transactions
are facilitated by international financial payments, in which the private banking system and the
central banks of the trading nations play important roles.

International trade and the accompanying financial transactions are generally conducted for the
purpose of providing a nation with commodities it lacks in exchange for those that it produces in
abundance; such transactions, functioning with other economic policies, tend to improve a
nation’s standard of living. Much of the modern history of international relations concerns efforts
to promote freer trade between nations. This article provides a historical overview of the
structure of international trade and of the leading institutions that were developed to promote
such trade.
Importance of International Trade
Import of unproduced products:
No country can’t produce every item that they need to consume in the world. With the help of
international trade, all countries are able to import their unproduced product with other countries.
Export of surplus product:
When a country produces a large number of goods than their needs, it can export its surplus
production with the help of international trade. Besides, those countries can earn foreign
currencies in these ways.
Dealing with emergencies:
When a country faces natural calamities like Tsunami, earthquake, cyclone, excessive rain, and
another disaster, then those countries need help to deal with emergencies. In that situation,
international trade helps by providing food, medicine, and other essential items to deal with
emergencies.
Importation of essential food product:
Underdeveloped countries face an excessive need for food, medicine, and other essential items
especially industrial goods. International trade helps other countries to feel up their basic demand
by exporting these items.
Expansion of the market:
Due to the poverty and low-income capacity of the people of underdeveloped countries, their
domestic market is limited. Besides, international trade expands the business market outside a
country.
Purchase of product at a low price:
Various countries can produce goods at a low cost having a comparative advantage. The
consumer also gets goods at a low price and consumes at a low price.
Increase capability:
The production capability of various countries is increased due to international trade. Besides,
there exists competition in the market because of international trade. That’s why every country is
trying to ensure the good quality of their product to survive in the market.
Increase international cooperation:
International trade increases the friendship and cooperation of various countries with each other.
Various countries build cultural cooperation by exchanging their goods with each other. As a
result, cooperation and friendship are built in various countries.
Adam Smith and the theory of Absolute Advantage
What is Absolute Advantage?
In economics, absolute advantage refers to the capacity of any economic agent, either an
individual or a group, to produce a larger quantity of a product than its competitors. Introduced
by Scottish economist, Adam Smith, in his 1776 work, “An Inquiry into the Nature and Causes
of the Wealth of Nations,” which described absolute advantage as a certain country’s intrinsic
capability to produce more of a commodity than its global competitors.
Smith also used the concept of absolute advantage to explain gains from free trade in the
international market. He theorized that countries’ absolute advantages in different commodities
would help them gain simultaneously through exports and imports, making the unrestricted
international trade even more important in the global economic framework.
Smith was the first economist to bring up the concept of absolute advantage, and his arguments
regarding the same supported his theories for a laissez-faire state. In “The Wealth of Nations”,
Smith first points out that, through opportunity costs, regulations favoring one industry take
away resources from another industry where they might have been more advantageously
employed.
Secondly, he applies the opportunity cost principle to individuals in a society, using the
particular example of a shoemaker not using the shoes he made himself because that would be a
waste of his productive resources. Each individual thus specializes in the production of goods
and services in which he or she has some sort of an advantage.
Thirdly, Smith applies the same principles of opportunity costs and specialization to international
economic policy, and the principle of international trade. He explains that it is better to import
goods from abroad where they can be manufactured more efficiently because it allows the
importing country to put its resources into its own most productive and efficient industries.
Smith thus emphasizes that a difference in technology between nations is the primary
determinant of international trade flows around the globe.
Assumptions of the Absolute Advantage Theory
Smith assumed that the costs of the commodities were computed by the relative amounts of labor
required in their respective production processes.
He assumed that labor was mobile within a country but immobile between countries.
He took into consideration a two-country and two-commodity framework for his analysis.
He implicitly assumed that any trade between the two countries considered would take place if
each of the two countries had an absolutely lower cost in the production of one of the
commodities.
https://www.britannica.com/topic/international-trade
https://www.myaccountingcourse.com/accounting-dictionary/international-trade
https://talkforbiz.com/importance-of-international-trade/
https://corporatefinanceinstitute.com/resources/knowledge/economics/what-is-absolute-
advantage/