International trade is the transaction of goods and services between different countries. It is taken as a major part of macroeconomics where various kinds of goods and services are exported and imported among the countries in the world. International trade operates due to cost difference, specialization, and division of labour. Since international trade is affected by various factors like natural or geographical factors, stage of economic development, accumulation of capital by a nation and its foreign investment, technological progress, trade financial regulation, political condition, and etc. Definitely, the cost of production will be different.
International trade has two aspects:
- bilateral international trade: If only two countries are participating to transact commodities between each other, then it will be called bilateral international trade.
- multilateral international trade: If more than two countries are involved in the export and import of goods and services, it is known as multilateral international trade
According to James C. Ingram, “Nations trade with each other because they benefit from it. Other motives may be involved, of course, but the basic motivation for international trade is that of gain. The gain from international trade, like gain from all trades, exists because specialization increases productivity.”
Foreign trade plays a vital role in the economic development of a country. An important aspect of foreign trade is efficient allocation of scarce resources among different countries.
Role or Importance of International/Foreign Trade
International trade affects various sectors of the economy directly and indirectly. The main roles of international trade are discussed below:
- Proper utilization of resources: Through international trade, nations specialize in producing those goods in which they have a greater comparative advantage. For example, Nepal’s water resources can be utilized at maximum capacity because of foreign trade.
- Benefits to consumers: Foreign goods, which are not produced domestically because of the higher production cost and other reasons, are easily accessible in the international market. So the consumer can take and enjoy by consuming them in both least cost and high quality. Similarly, it helps to control crisis of goods and services by importing necessary goods from other counties too.
- Increase in employment and income: International trade does not provide only goods and services but it also increases income of the people along with the increase in employment opportunities in the nation. More goods are demanded in the international market. It creates more employment and thereby more income earning opportunities.
- Economic development: Due to international trade, the countries will be producing and exporting the goods which have comparative advantage and demanded in the foreign markets. As a result, demand for labour increases. So people can get employment and their income increases. Also the existing resources will be fully and efficiently utilized. Then, the overall economy of a nation will be improved.
- Good relation with foreign countries: International trade helps to build up good relation with foreign countries in the international market. Having a good relation with various countries, it creates platform for a country to improve trade and show its efficiency, capacity, and economic condition in the world.
- Benefits from specialization: There is great chance of specialization and division of labour owing to international trade. In this trade, every nation is producing those goods which have higher comparative advantage. As a result, production increases with quality goods and compete in international market by achieving benefits in specialization due to the division of labour and specialization. For example, Nepal can specialize in hydroelectricity, Gulf countries have specialized in petroleum products; and Japan, China, and Germany have specialized in electronic and other goods.