INTERNATIONAL TRADE

Trade refers to the buying and selling of goods and services. Trade may also mean the exchange
of goods and services for money or other goods and services. Trade within a country is called
internal or domestic trade while trade between countries is called international trade, foreign or
external trade.

Therefore, international trade refers to the buying and selling of goods and services between
countries. It can either be bilateral or multilateral trade

Bilateral trade refers to trade between two countries such as trade between Cameroon and
Nigeria. Multilateral trade refers to trade involving many countries such as Cameroon trading
with Nigeria, China and Japan.

Differences between internal and external trade

1. Distance: Domestic trade involves short distances shorter distances covered within the
boundaries of a country while international trade involves longer distance movement across
international boundaries.

2. Cost of transportation: Internal trade involves little transport cost while transportation cost
are higher with external trade.

3. Language: internal trade may make use of a single language or few languages while
international trade makes use of many languages.

4. Weights and units of measurement: Domestic trade involves the same weights and
measurement units while different weights and measurement units may be used in international
trade.

5. Trade barriers: international trade is usually regulated through trade restriction which is nit
the case with home trade.

6. Currencies: With domestic trade only one currency is used while different currencies are used
in external trade.

7. Legal and political systems: These differ between countries and therefore affect the pattern
of international trade than home trade.

Reasons or Bases for International trade

The following reasons explain why countries of the world engages in international trade

1. Differences in resources endowment: The uneven distribution of resources amongst

countries creates differences in abilities to produce certain goods and services. Hence countries
engage in external trade so as to consume the goods they cannot produce.
2. Differences in climatic conditions: Due to climatic differences, different crop are grown in
different regions of the world. For example much wheat is produced in Russia while rice is
produced in countries of South Eastern Asia (Indonesia, Philippines, Cambodia, Thailand, china,
india, Vietnam, Taiwan, Hong kong etc). These products and others produced elsewhere are
consumed in other parts of the world thanks to international trade.

3. Differences in skills. Educational system dev’t differs from one country to another, which
results in differences in the acquisition of skill and expertise required for the production of
different goods and services in different countries of the world. For eg Good computers are
produced in the USA and some developed countries and are consumed in developing countries
through international trade.

4. Differences in production methods (Technology): some countries have advanced tech in the
production of certain goods and services than others countries. Countries without good tech will
depend on others through international trade.

5. Immobility of some factors of production: since resources are unevenly distributed between
countries some of them cannot be easily moved from one country to another. For example Land
is geographically immobile, while language, religion, customs, political instability and other
forms of barriers may restrict the mov’t of labour and capital.

6. Differences in economic advantage. Countries may engage in international trade because it is

cheaper for them to produce to certain goods and also cheaper for them to buys other goods they
can’t produce with ease.

7. For political advantage or for strategic reason: countries may engage in international trade
for strategic reasons or because they want to achieve a political objective

Principles or theories of international trade

There are two basic theories that explain the basis of international trade. These theories include
the principle of absolute cost advantage and the principle of comparative cost advantage. They
both explain how countries can specialise in the production of certain goods and hence benefit
from international trade with each other. To better understand these theories, the following
assumptions are made.

1. Only two countries are considered to be involved in IT eg Cam And japan

2. Only two goods are produced by these countries e.g Coffee and cars

3. The quantity of resources available in both countries is the same i.e 20 units of resources each.

4. Each country devotes only half of its resources in the production of each good.
5. The domestic opportunity cost ratios of producing the two goods are different in the two
countries

6. The available resources are easily moved from one country to another.

7. There are constant returns in alternative uses of resources.

8. There are no trade barriers i.e trade is free between the two countries

9. No transport cost are involved

The Theory of absolute cost advantage