International Trade

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Main objective:
 The main objective of this chapter is to make students familiar
with the basic concepts of international trade and Economics.

Content
 Definitions and Basic concepts
 Bases for International Trade
 Advantages and challenges of International trade
 International Trade Vs Domestic Trade
 International Trade Vs International Finance

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 1-Definition and Concept of International Economics
 The human wants are varied and unlimited
 No single country possesses the adequate resources to satisfy all
these wants.
 No country is self sufficient in producing all the required goods
and services from its own resources.
 Hence there arises a need for interdependence between
countries in the form of international trade.
 International trade is the exchange of capital, goods, and services
across international borders or territories.
 In simple words, it means the export and import of goods and
services.
 Export means selling goods and services out of the country
 Import means goods and services flowing into the country.

 In most countries, such trade represents a significant share of

gross domestic product (GDP).
 With international trade countries obtain those goods which it
cannot produce or cannot produce as cheaply as possible in another
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  However this is not the only basis for doing international
trade, there are other reasons also.
 Trade economists have laid down different theories for
international trade.
 To effectively utilize the world’s resources---- international
trade is to be boosted and the problems faced by the countries
should be dealt with.
 Nations are more closely linked through trade in goods and
services, through flows of money, and through investment
than ever before.
 International economics is a branch of economics deals with
about how nations interact through trade of goods and
services, through flows of money and through investment.
 It is an old subject, but it continues to grow in importance
as countries become tied to the international economy.

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  Most economists globally agree that international trade helps boost
nations’ wealth.
 The importance of international trade was recognized early on
by political economists like Adam Smith and David Ricardo.

 When a person or company purchases a cheaper product or service

from another country, living standards in both nations rise.
 There are several reasons why we buy things from foreign
suppliers.
 Perhaps, the imported options are cheaper.

 Their quality may also be better, as well as their

availability.

 The exporter also benefits from sales that would not be possible if it
solely sold to its own market.
 The exporter may also earn foreign currency.

 It can subsequently use that foreign currency to import things.

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 Figure 1: Merchandise Export and Import Trend: World

25000

20000

15000

10000

5000

Export Import

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 Figure 2: Merchandise Export and Import Trend: SSA

500

450

400

350

300

250

200

150

100

50

Export Import

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 Figure 3: Merchandise Export and Import Trend: Ethiopia
18000

16000

14000
In Billion Current USD

12000

10000

8000

6000

4000

2000

0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Export Import

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 2-Basis for International Trade
 Our modern industrialized world would not exist if countries
did not import and export.
 Put simply; international trade is at the heart of today’s
global economy.

 We import goods and services for several reasons. Below are

some reasons:
Price: a foreign company can produce something
more cheaply.
Quality: may be superior abroad.
Availability: it might not be possible to produce the
item locally.
Demand: might be greater than local supply. To
satisfy the difference, it is necessary to import.

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  The major reasons behind International Trade are:
1-Differences in Resource Endowments
 Trade can occur between countries if the countries differ in their
endowments of resources.
 Resource endowments refer to the skills and abilities of a
country’s workforce, the natural resources available within its
borders, and the sophistication of its capital stock.
 The basis for trade in both the pure exchange model in "The
Pure Exchange Model of Trade" and "The Heckscher-Ohlin Model" is
differences in resource endowments.
2-Differences in Technology
 Trade can occur between countries if the countries differ in their
technological abilities to produce goods and services.
 Technology refers to the techniques used to turn resources
(labor, capital, land) into outputs (goods and services).
 The basis for trade in the Ricardian model of comparative
advantage in is differences in technology.

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 3-Existence of Economies of Scale in Production
 The existence of economies of scale in production is sufficient to
generate advantageous trade between two countries.
 Economies of scale refer to a production process in which
production costs fall as the scale of production rises.
 This feature of production is also known as “increasing returns to
scale.”
4-Differences in Demand
 Advantageous trade can occur between countries if demands or
preferences differ between countries.
 Individuals in different countries may have different preferences
or demands for various products.
 For example, the Chinese are likely to demand more rice
than Americans, even if consumers face the same price.
5-Existence of Government Policies
 Government tax and subsidy programs alter the prices charged for
goods and services.
 In these circumstances, trade may arise solely due to differences
in government policies across countries.

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 3-Advanatages and Challenges to International Trade
Advantages of International Trade
 Comparative Advantage
 trade encourages a nation to specialize in producing or supplying only those
goods and services which it can deliver more effectively and at the best
price, after taking into account opportunity cost.
 Competition
 International trade boosts competition.
 This, in turn, is good for prices and quality.
 If suppliers have to compete more, they will work harder
to sell at the lowest price and best quality possible.
Consumers benefit by having more choice, more money left over, and

top-quality goods.
 Transfer of Technology
 Technology transfer increases with to international trade.
 Transfer of technology goes from the originator to a secondary user.
 In fact, that secondary user is often a developing nation.
 Job Creation
 Great trading nations such as Japan, Germany, the UK, the USA, and
South Korea have one thing in common.
 They have much lower levels of unemployment than protectionist
countries.
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 Disadvantages of International Trade
 Over-Specialization
Employees might lose their jobs in large numbers if global demand for a

product declines.
 Unfair to New Companies
 Find it much harder to grow if they have to compete against giant foreign
firms.
 Threat to National Security
 If a country is totally dependent on imports for strategic industries, it is at
risk of being held to ransom by the exporter(s).
 Strategic industries include food, energy and military equipment.
 Over-dependence
 Countries or companies involved in the foreign trade are vulnerable to
global events.
 An unfavorable event may impact the demand of the product, and could
even lead to job losses.
 For instance, the recent US-China trade war will adversely affect the
Chinese and US export industries.
 Pressure on Natural Resources
 A country only has limited natural resources.
 But, if it opens its doors to the foreign companies, it could
drain those natural resources much quicker.

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 4-International Trade Vs Domestic Trade
 International trade refers to trade between two different countries (such
as Ethiopa and Kenya) or one country and the rest of the world
(e.g., Ethiopia and UK, Germany, U.S.A., etc.).
The former is called bilateral trade and the latter
multilateral trade.
 Domestic trade or internal trade is the trade which takes places between
the different regions of the same country.

 It is to be noted that there are some points of similarities between these

two kinds of trade.
 All trade, whether domestic or interna-tional, arises from
specialization.
 As one region of a country brings the goods from other
regions to make up the deficiencies, one country tries to
bring goods and services, in which it has deficiencies, from
other countries.

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 HOME TRADE FOREIGN TRADE

Home trade refers to the trade within the Foreign Trade refers to the trade between
borders of the country. two or more countries.

Exchange of Currencies

There is no exchange of currencies takes Foreign Trade involves the exchange of

place in the Home trade because there is a currencies between the nations which are
same currency in the country. involved in the trade.

Restrictions on transfer of goods

Home trade usually doesn't have any Foreign Trade is subjected to many
restrictions on movement inside the restrictions on transfer to certain goods to
country. certain countries.

Transportation costs

Foreign Trade involves very high

Home Trade generally has fewer
transportation costs and risky situations to
transportation costs and risks to transfer
transfer goods from one country to
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goods. 15
another.
 HOME TRADE FOREIGN TRADE

Transport Systems

Home Trade depends upon the network Foreign Trade depends upon the seaways
and internal transport systems like roads, and the airways between the countries
railways, etc. involved in the trade.

Benefit to Country

Home trade leads to economic

Foreign Trade leads to the economic
development and self-sufficiency of the
interdependence between the countries.
country.

Approvals

The home trade involves fewer documentations Foreign Trade involves more documentations
and approvals from the government to transfer and approvals from government and it is a long
the goods. process to get approvals from government.

Volume of Trade

The volume of the trade depends upon the Foreign Trade has many restrictions
population of the country, demand for the imposed on free entry of goods and many
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product, etc duties and taxes have to be paid to trade
 HOME TRADE FOREIGN TRADE

Time Gap

Home trade usually have less time gap Foreign Trade involves wide time gap
between the goods dispatched and goods between the goods dispatched from the
received and payment received for the home country and goods received by the
consignment. other country.

Credit Problems

In the case of Home Trade, there are fewer Foreign trade involves special steps to find
credit problems between the sellers and out the credit worthiness of the importer
buyers in the country. by the exporter of the goods.

Trading of Goods

Foreign Trade facilitates countries to

Home trade only involves the trade of the
export the goods which they have surplus
goods and services which are available in
and import goods which are short in
the country.
supply.
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 HOME TRADE FOREIGN TRADE

Flow of Currency

Foreign Trade helps in exchange of

Home Trade helps in the flow of currency
currencies between two countries and
from one place to another place in the
helps increase of foreign exchange
country.
reserves.

Advantage to People

Home Trade helps in increase the Foreign Trade helps in bringing the
employment and specialization within the international division of labour and
country. specialization.

Insurance

The goods of Home Trade don't carry a The goods which are sent to other
compulsion to have the insurance for countries by the foreign need to be
goods in transport. insured compulsorily.
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 5-International Trade Versus International Finance
 The study of international finance is intertwined with the study of
international trade.
 International trade: the flow of physical goods and services among nations.
 International trade focuses on transactions of goods and services
across nations.
 These transactions usually involve a physical movement of goods or
services.
 International finance: the monetary flow used to pay for the physical trade.
 International finance focuses on financial or monetary transactions
across nations.
 International finance is concerned with the "paper" or financial side of
the global economy.
 Goods and services flow in one direction and monetary payments flow
in the other.

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