The importance of international trade

As the world gradually becomes one large market, we can notice that the same goods and services can be found in many countries throughout the world. Most countries benefit from trading with other countries.

Benefits of international trade to a country

  • A country can obtain goods and services which are not produced in that country or which is too costly to produce. Sometimes production may need to be done with raw materials do not occur naturally in the country, and that can be imported through international trade.
  • It is cheaper to import some goods than to produce them. For example bananas in UK.
  • Selling goods and services abroad provides the country with foreign currency.
  • By selling abroad the country gains the benefits of wider markets. This allows for large scale production which gives the benefits of economies of scale.
  • International trade creates employment opportunities in the country.
  • Consumers in the country will have a wider variety of goods from all over the world.
  • It increases country’s income, which results in a higher standard of living.
  • It helps to maintain friendly foreign relationships with other countries.
  • Income can be earned by exporting the excess goods and services.

THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET

No country in the world is self sustained. By nature, every country has some resources in its limit and some resources maybe abundantly available.

International trade often makes countries specialise in what they are best at producing. When specialisation happens, the countries tend to produce fewer products than before. However, the consumers want to enjoy products that are produced all over the world. Therefore, countries are less and less self-sufficient, and more and more interdependent in today’s world.

Globalisation and interdependence of countries has arisen due to many reasons:

  • There is an increase in the number of multinational companies.
  • For many reasons, expanding the business to other countries has become a way of over coming the barriers to trade, which means the production of a firm will take place in more than one country.
  • Technological change – better computer and improved communication technology has data to be transferred easily and quickly. The internet has enabled customers in a country to purchase goods from many other countries in the world.
  • The cost of communication and transportation has fallen in real terms. It is not only less costly, but the speed and efficiency of communication and transport has greatly improved. This has enabled goods to be moved to greater distances. More and more people also travel to see what other countries can offer.
  • Consumer tastes have changed. While some people maybe content with what the domestic market can offer, others wish to purchase foreign-made products.
  • More and more countries are now able to compete with the developed world because of advantage in availability of factors of production such as labour.
  • More and more countries are opening up to the world, removing barriers and thus trade has become liberalised. Creation of trading blocs and the relaxation of import duties in many parts of the world has made countries interdependent politically.
  • Some countries are so small that they need to depend on larger neighbouring countries.

Exports, Imports, Visible and Invisible Trade

Exports are goods and services sold to other countries. Any trading of goods or services which bring money to the country is regarded as an export.

Imports are goods and services purchased from other countries, which are paid for by an outflow of money from the country.

Visible imports are imports of physical goods such as manufactured goods, electronics and chemicals etc.

Invisible imports are imports of services. This happens when the an individual/firm/organisation/institution enjoys a service given by a foreign entity, and by which money outflows from the country.

Visible exports are exports of physical goods.

Invisible exports are exports of services. A good example of an invisible export of Maldives is tourism. Whenever a tourist spends a holiday in a Maldivian resort, money flows in and thus is considered as an invisible export.

Visible import and visible export together are known as visible trade. Invisible import and invisible export together are known as invisible trade.

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