Definition :

The exchange of goods or services along international borders. This type of trade allows for a greater
competition and more competitive pricing in the market. The competition results in more affordable
products for the consumer. The exchange of goods also affects the economy of the world as dictated
by supply and demand, making goods and services obtainable which may not otherwise be available
to consumers globally.
What is international trade.. ??en
If you walk into a supermarket and are able to buy South American bananas, Brazilian coffee and a
bottle of South African wine, you are experiencing the effects of international trade.

International trade allows us to expand our markets for both goods and services that otherwise may
not have been available to us. It is the reason why you can pick between a Japanese, German or
American car. As a result of international trade, the market contains greater competition and
therefore more competitive prices, which brings a cheaper product home to the consumer.

What Is International Trade?

International trade is the exchange of goods and services between countries. This type of trade gives
rise to a world economy, in which prices, or supply and demand, affect and are affected by global
events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby
increasing the manufacturing costs for an American sneaker company based in Malaysia, which
would then result in an increase in the price that you have to pay to buy the tennis shoes at your
local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less
for your new shoes.

Trading globally gives consumers and countries the opportunity to be exposed to goods and services
not available in their own countries. Almost every kind of product can be found on the international
market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also
traded: tourism, banking, consulting and transportation. A product that is sold to the global market
is an export, and a product that is bought from the global market is an import. Imports and exports
are accounted for in a country's current account in the balance of payments.

Increased Efficiency of Trading Globally

Global trade allows wealthy countries to use their resources - whether labor, technology or capital more efficiently. Because countries are endowed with different assets and natural resources (land,
labor, capital and technology), some countries may produce the same good more efficiently and

therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it
can obtain the item by trading with another country that can. This is known as specialization in
international trade.

Let's take a simple example. Country A and Country B both produce cotton sweaters and wine.
Country A produces 10 sweaters and six bottles of wine a year while Country B produces six
sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however,
takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total
of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours
to produce six bottles of wine (total of four hours).
Countries

No of swetr

no of wine

10(3)

6(2)

6(1)

10(3)

But these two countries realize that they could produce more by focusing on those products with
which they have a comparative advantage. Country A then begins to produce only wine and Country
B produces only cotton sweaters. Each country can now create a specialized output of 20 units per
year and trade equal proportions of both products. As such, each country now has access to 20 units
of both products.

We can see then that for both countries, the opportunity cost of producing both products is greater
than the cost of specializing. More specifically, for each country, the opportunity cost of producing
16 units of both sweaters and wine is 20 units of both products (after trading). Specialization
reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they
need. With the greater supply, the price of each product would decrease, thus giving an advantage
to the end consumer as well.

Note that, in the example above, Country B could produce both wine and cotton more efficiently
than Country A (less time). This is called an absolute advantage, and Country B may have it because
of a higher level of technology. However, according to the international trade theory, even if a
country has an absolute advantage over another, it can still benefit from specialization.

Other Possible Benefits of Trading Globally

International trade not only results in increased efficiency but also allows countries to participate in
a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the
amount of money that individuals invest into foreign companies and other assets. In theory,
economies can therefore grow more efficiently and can more easily become competitive economic
participants.

For the receiving government, FDI is a means by which foreign currency and expertise can enter the
country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic
product. For the investor, FDI offers company expansion and growth, which means higher revenues.

The Bottom Line

As it opens up the opportunity for specialization and therefore more efficient use of resources,
international trade has the potential to maximize a country's capacity to produce and acquire goods.
Opponents of global free trade have argued, however, that international trade still allows for
inefficiencies that leave developing nations compromised. What is certain is that the global economy
is in a state of continual change, and, as it develops, so too must all of its participants.
Benefits
International trade has flourished over the years due to the many benefits it has offered to
different countries across the globe. International trade is the exchange of services, goods, and
capital among various countries and regions, without much hindrance. The international trade
accounts for a good part of a countrys gross domestic product. It is also one of important sources of
revenue for a developing country.

With the help of modern production techniques, highly advanced transportation systems,
transnational corporations, outsourcing of manufacturing and services, and rapid industrialization,
the international trade system is growing and spreading very fast.

International trade among different countries is not a new a concept. History suggests that in the
past there were several instances of international trade. Traders used to transport silk, and spices
through the Silk Route in the 14th and 15th century. In the 1700s fast sailing ships called Clippers,
with special crew, used to transport tea from China, and spices from Dutch East Indies to different
European countries.

The economic, political, and social significance of international trade has been theorized in the
Industrial Age. The rise in the international trade is essential for the growth of globalization. The

restrictions to international trade would limit the nations to the services and goods produced within
its territories, and they would lose out on the valuable revenue from the global trade.

The benefits of international trade have been the major drivers of growth for the last half of the
20th century. Nations with strong international trade have become prosperous and have the power
to control the world economy. The global trade can become one of the major contributors to the
reduction of poverty.

David Ricardo, a classical economist, in his principle of comparative advantage explained how trade
can benefit all parties such as individuals, companies, and countries involved in it, as long as goods
are produced with different relative costs. The net benefits from such activity are called gains from
trade. This is one of the most important concepts in international trade.

Adam Smith, another classical economist, with the use of principle of absolute advantage
demonstrated that a country could benefit from trade, if it has the least absolute cost of production
of goods, i.e. per unit input yields a higher volume of output.
According to the principle of comparative advantage, benefits of trade are dependent on the
opportunity cost of production. The opportunity cost of production of goods is the amount of
production of one good reduced, to increase production of another good by one unit. A country with
no absolute advantage in any product, i.e. the country is not the most competent producer for any
goods, can still be benefited from focusing on export of goods for which it has the least opportunity
cost of production.
Benefits of International Trade can be reaped further, if there is a considerable decrease in barriers
to trade in agriculture and manufactured goods.
Some important benefits of International Trade

Enhances the domestic competitiveness

Takes advantage of international trade technology
Increase sales and profits
Extend sales potential of the existing products
Maintain cost competitiveness in your domestic market
Enhance potential for expansion of your business
Gains a global market share
Reduce dependence on existing markets
Stabilize seasonal market fluctuations

Importance of International Trade

The buying and selling of goods and services across national borders is known as international trade.
International trade is the backbone of our modern, commercial world, as producers in various
nations try to profit from an expanded market, rather than be limited to selling within their own
borders. There are many reasons that trade across national borders occurs, including lower
production costs in one region versus another, specialized industries, lack or surplus of natural
resources and consumer tastes.
One of the most controversial components of international trade today is the lower production costs
of "developing" nations. There is currently a great deal of concern over jobs being taken away from
the United States, member countries of the European Union and other "developed" nations as
countries such as China, Korea, India, Indonesia and others produce goods and services at much
lower costs. Both the United States and the European Union have imposed severe restrictions on
imports from Asian nations to try to stem this tide. Clearly, a company that can pay its workers the
equivalent of dollars a day, as compared to dollars an hour, has a distinct selling advantage.
Nevertheless, American and European consumers are only too happy to lower their costs of living by
taking advantage of cheaper, imported goods.
Even though many consumers prefer to buy less expensive goods, some international trade is
fostered by a specialized industry that has developed due to national talent and/or tradition. Swiss
watches, for example, will never be price-competitive with mass produced watches from Asia.
Regardless, there is a strong market among certain consumer groups for the quality, endurance and
even "snob appeal" that owning a Rolex, Patek-Philippe or Audemars Piguet offers. German cutlery,
English bone China, Scottish wool, fine French silks such as Hermes and other such products always
find their way onto the international trade scene because consumers in many parts of the world are
willing to foster the importation of these goods to satisfy their concept that certain countries are the
best at making certain goods.
One of the biggest components of international trade, both in terms of volume and value of goods is
oil. Total net oil imports in 2005 are over 26 million barrels per day (U.S. Energy Information
Administration figures) (Note: Imports include crude oil, natural gas liquids, and refined products.)
At a recent average of $50 per barrel, that translates to $1billion, three hundred million, PER DAY.
The natural resources of a handful of nations, most notably the nations of OPEC, the Organization of
Petroleum Exporting Countries, are swept onto the international trade scene in staggering numbers
each day, and consumer nations continue to absorb this flow. Other natural resources contribute to
the movement of international trade, but none to the extent of the oil trade. Diamonds from Africa,
both for industrial and jewelry use, wheat and other agricultural products from the United States
and Australia, coal and steel from Canada and Russia, all flow across borders from these nations that
have the natural resources to the nations that lack them.
Despite complaints about trade imbalances, effects on domestic economies, currency upheavals,
and loss of jobs, the reality of goods and services continually crossing borders will not go away.
International trade will continue to be the engine that runs most nations.

Information is for educational and informational purposes only and is not be interpreted as financial
or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please
consult your financial advisor