The transaction of goods and services between or among different countries is called international trade. Foreign trade plays a vital role in the economic development of a country. An important aspect of foreign trade is efficient allocation of scare resources among different countries. International trade has two aspects: bilateral international trade and multilateral international trade.
1. Bilateral International Trade:
If only two countries are participating to transact commodities between each other, then it will be called bilateral international trade.
2. 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.
Role or Importance of International Trade:
1. Proper Utilization of Resources:
Through international trade, nations specialize in producing those goods in which they have a greater comparative advantage. Each and every country always tries to allocate the available resources properly and efficiently.
2. 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 both in least cost and high quality.
3. Increase in Employment and Income:
International trade 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 there by more income earning opportunities.
4. Good Relation with Foreign Countries:
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.
5. Benefits from Specialization:
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 labor and specialization.
Concept of Balance of Trade (BOT):
Balance of trade is the summary of total volume of exports and imports of visible goods and services of a country with the rest of the countries in the world. Visible goods are those goods which are duly recorded at custom barriers of the country. BOT can have three scenarios. If the value of export exceeds the value of import, it is known as favorable or surplus balance of trade, which is a healthy indicator of economic development. If the value of export is less than the value of import, it is called deficit or unfavorable or adverse balance of trade. Similarly, if the value of export is equal to value of import, it is called balanced balance of trade.
Concept of Balance of Payment (BOP):
A comprehensive record of economic transactions of a country with the rest of the world during a given period of time is called Balance of Payment. It includes the trade of visible as well as invisible items. It has two sides- credit side and debit side. All payments to be received from abroad are recorded on the debit side and all payments to be made to the foreigners are included on the credit side. If receipts and payments are equal, it is known as equilibrium balance of payment or balanced balance of payment. If receipts are greater than payments, it is known as surplus or favorable balance of payment. If receipts are less than payments, it is known as deficit balance of payments.