Meaning and Reasons for International Trade

Introduction

Global trade is advantageous for wealthy countries as they can use more of their resources, such as technology, capital, and labor, more efficiently than other countries. Different countries have different assets and natural resources which let them have a market internationally because they can sell their items cheaper than in the home market.

Before learning about international trade, let us first try to understand what are imports and exports, as these two are inseparable parts of international trade. In trade, when one country buys products from the international marketplace is called import. On the other hand, when a country sells its products to the global market it is known as an export

Due to the resourcefulness of countries that have different assets, they are able to produce the same or similar goods more efficiently. Simply put, they can produce an item quickly and at a lower cost. This allows them to price items at lower costs than other countries. If a country cannot produce items at a lower cost, or when a country is less efficient in producing an item, it can source that item from another efficient country. This is called specialization in international trade.

Meaning of International Trade

International trade is a very important phenomenon. As the name suggests, international trade refers to trade that takes place internationally, requiring a minimum of two countries to trade internationally. International trade usually means purchasing and selling goods and services between two countries.

• In the case of international trade, one company sells or exports the product while another buys or imports it. Therefore, international trade is the reason for exports and imports taking place in the international marketplace.

• Usually, all types of items are bought and sold in international markets. This includes raw materials, consumer goods, food products, and machinery to name a few. It not only makes products available in a country that would usually not have them domestically but it also expands the markets of countries internationally.

• International trade makes markets more competitive and the competition makes cheaper products available in the home country. International trade is a part of international business where companies establish their plants near the home country or in the home country where there is a vast market for the products and where the cost of production is lower. This allows companies to operate globally and increase their profitability and revenues.

• International trade is now related to the global economy where supply and demand, impact prices and thereby impacted by global events. For example, Taiwan is a major manufacturer of computer chips in the global market. Therefore, if the prices of chips increase in Taiwan, it will impact the global computer market and the prices of computers will go up.

Significant Reasons for International Trade

Production Specialization

As mentioned above, it is impossible for any country to have specialization in all of the products required in the country. Some products may not be available in the country as a result of this. This implies that if international trade were unavailable the home country will never have the products that it cannot produce on its own. Therefore, production is a reason why international trade is done.

Different factors of production

Factors of production, such as land, labor, capital, and technology are different for each different country. So, every country cannot produce products at the same rate. This means that countries with different factors of production will produce different items at different prices. This will allow some countries to produce some products at lower costs than others. Therefore, such countries will be able to export these products in markets where the price of the product is higher.

Comparative advantage

Comparative advantage refers to the advantage of countries in producing certain products over other countries.

For example, the costs of production of a certain item may be suitable for one country while another country may find it suitable to produce a different item. This will ultimately result in countries producing different goods for their own advantage. This will then imply that the products are bought and sold internationally to gain the advantage of costs.

Cost of production

The cost of production of items is different in different countries. Therefore, companies of one country may be able to offer a certain product at a lower cost than other countries. This advantage of costs can let countries produce products selectively which can then be bought and sold in the international markets.

Therefore, countries will produce items that are less costly for them and allow other countries to produce the rest of the items that it needs but is costly to produce in the home country.

Resource Distribution

The natural resources are not evenly distributed among the countries. Many companies find it a limitation to produce a certain good. Therefore, countries will focus on producing the items that are easily available in their home country. Resource distribution will therefore lead to international trade.

Key Takeaways

• International trade refers to trade that is done internationally. It often requires a minimum of two countries to trade internationally.

• In the case of international trade, one company sells or exports the product while another buys or imports it. Therefore, international trade is the reason for exports and imports taking place in the international marketplace.

• International trade makes markets more competitive and the competition makes cheaper products available in the home country.

• International trade is a part of international business where companies establish their plants near the home country or in the home country where there is a vast market for the products and where the cost of production is lower.

• International trade is now related to the global economy where the supply and demand, and therefore prices impact and get impacted by global events.

• If a country cannot produce items at a lower cost, or when a country is less efficient in producing an item, it can source that item from another efficient country. This is called specialization in international trade.

Conclusion

The world economy is now in a position where international trade is ever-expanding and indispensable. Therefore, one must understand what international trade means and why is it important. Without a proper idea of international trade, no economy can sustain the global impact of businesses. That is why it is so important in terms of globalization.

FAQs

Qns 1. Why is international trade important?

Ans. International trade is important because it not only makes products available in a country that would usually not have them domestically but it also expands the markets of countries internationally.

Qns 2. What is the impact of globalization on international trade?

Ans. International trade is now related to the global economy where the supply and demand, and therefore prices impact and get impacted by global events.

Qns 3. What is meant by specialization in international trade?

Ans. If a country cannot produce items at a lower cost, or when a country is less efficient in producing an item, it can source that item from another efficient country. This is called specialization in international trade.