A

PROJECT REPORT

ON

“WHY WE NEED INTERNATIONAL TRADE”

IN PARTIAL FULFILLMENT OF THE REQUIREMENT

PRESCRIBED FOR

B.A. LLB (HONS.) SEMESTER-2

Submitted To: Submitted By;

Dr. Mahendra Parihar Name: Tanay Khandelwal

Associate Professsor Registration No. : 161401106

MANIPAL UNIVERSITY, JAIPUR

(Dehmi Kalan, Jaipur-Ajmer Highway, Jaipur-303007)

2017

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 ACKNOWLEDGEMENT

I hereby acknowledge the help and support of the teachers, who helped me in compiling this
project. I thank the faculty and management of Manipal University Jaipur, School of Law, as
the resources that were necessary to complete the project were provided by them.
I am highly indebted to my teacher “Dr. Mahendra Parihar” for his guidance and constant
supervision as well as for providing necessary knowledge regarding the subject at hand and
also for his support in completing the project.
I would like to express my gratitude towards my parents and friends for their kind
cooperation and encouragement which help me in completion of this project.

_______________
TANAY KHANDELWAL

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 CERTIFICATE

This is to certify that Mr. Tanay khandelwal, student of B.A. LL.B. (Hons.) Semester II,
School of Law, Manipal University Jaipur has completed the project work entitled “WHY
WE NEED INTERNATIONAL TREADE?” under my supervision and guidance.
It is further certified that the candidate has made sincere efforts for the completion of this
project.

DATE: 30/03/2017 _______________

Dr. Mahendra Parihar

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Contents
INTERNATIONAL TRADE .................................................................................................................. 5
INCREASED EFFICIENCY OF TRADING GLOBALLY................................................................... 5
WHY INTERNATIONAL TRADE IS IMPORTANT? ......................................................................... 6
ADVANTAGES OF INTERNATIONAL TRADE................................................................................ 9
DISADVANTAGES OF INTERNATIONAL TRADE ....................................................................... 10
CONCLUSION ..................................................................................................................................... 10
WEBLIOGRAPHY............................................................................................................................... 11

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 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 labour, 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 labour, 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, jewellery, 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 payments1

INCREASED EFFICIENCY OF TRADING GLOBALLY

Global trade allows wealthy countries to use their resources - whether labour, technology
or capital - more efficiently. Because countries are endowed with different assets and natural
resources (land, labour, 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).

1
http://www.investopedia.com/articles/03/112503.asp

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 WHY INTERNATIONAL TRADE IS IMPORTANT?

Countries trade with each other when, on their own, they do not have the resources, or
capacity to satisfy their own needs and wants. By developing and exploiting their
domestic scarce resources, countries can produce a surplus, and trade this for the resources
they need.

Clear evidence of trading over long distances dates back at least 9,000 years, though long
distance trade probably goes back much further to the domestication of pack animals and the
invention of ships. Today, international trade is at the heart of the global economy and is
responsible for much of the development and prosperity of the modern industrialised world.

Goods and services are likely to be imported from abroad for several reasons. Imports may be
cheaper, or of better quality. They may also be more easily available or simply more
appealing than locally produced goods. In many instances, no local alternatives exist, and
importing is essential. This is highlighted today in the case of Japan, which has no oil
reserves of its own, yet it is the world’s fourth largest consumer of oil, and must import all it
requires.

The production of goods and services in countries that need to trade is based on two
fundamental principles, first analysed by Adam Smith in the late 18th Century (in The Wealth
of Nations, 1776), these being the division of labour and specialisation.

 DIVISION OF LABOUR

In its strictest sense, a division of labour means breaking down production into small,
interconnected tasks, and then allocating these tasks to different workers based on their
suitability to undertake the task efficiently. When applied internationally, a division of
labour means that countries produce just a small range of goods or services, and may
contribute only a small part to finished products sold in global markets. For example, a bar of
chocolate is likely to contain many ingredients from numerous countries, with each country
contributing, perhaps, just one ingredient to the final product.

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  SPECIALISATION

Specialisation is the second fundamental principle associated with trade, and results from the
division of labour. Given that each worker, or each producer, is given a specialist role, they
are likely to become efficient contributors to the overall process of production, and to the
finished product. Hence, specialisation can generate further benefits in terms of efficiency
and productivity.

Specialisation can be applied to individuals, firms, machinery and technology, and to whole
countries. International specialisation is increased when countries use their scarce resources
to produce just a small range of products in high volume. Mass production allows a surplus of
good to be produced, which can then be exported. This means that goods and resources must
be imported from other countries that have also specialised, and produced surpluses of their
own.

When countries specialise they are likely to become more efficient over time. This is partly
because a country's producers will become larger and exploit economies of scale. Faced by
large global markets, firms may be encouraged to adopt mass production, and apply new
technology. This can provide a country with a price and non-price advantage over less
specialised countries, making it increasingly competitive and improving its chances of
exporting in the future.

 DIFFERENCES IN TECHNOLOGY

Advantageous trade can occur between countries if the countries differ in their technological
abilities to produce goods and services. Technology refers to the techniques used to turn
resources (labour, capital, land) into outputs (goods and services).2

 DIFFERENCES IN RESOURCE ENDOWNMENTS

Advantageous trade can occur between countries if the countries differ in their endowments
of resources. Resource endowments refer to the skills and abilities of a country’s workforce,
the natural resources available within its borders (minerals, farmland, etc.), and the
sophistication of its capital stock (machinery, infrastructure, communications systems).

2
http://catalog.flatworldknowledge.com/bookhub/28?e=fwk-61960-ch02_s01

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  DIFFERENCES IN DEMAND

Advantageous trade can occur between countries if demands or preferences differ between
countries. Individuals in different countries may have different preferences or demands for
various products. For example, the Chinese are likely to demand more rice than Americans,
even if consumers face the same price. Canadians may demand more beer, the Dutch more
wooden shoes, and the Japanese more fish than Americans would, even if they all faced the
same prices.
 EXISTENCE OF ECONOMIES OF SCALE IN PRODUCTION

The existence of economies of scale in production is sufficient to generate advantageous

trade between two countries. Economies of scale refer to a production process in which
production costs fall as the scale of production rises. This feature of production is also known
as “increasing returns to scale.”
 EXISTENCE OF GOVERNMENT POLICIES

Government tax and subsidy programs alter the prices charged for goods and services. These
changes can be sufficient to generate advantages in production of certain products. In these
circumstances, advantageous trade may arise solely due to differences in government policies
across countries.

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.

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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 REASONS:

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.

ADVANTAGES OF INTERNATIONAL TRADE

International trade brings a number of valuable benefits to a country, including:

1. The exploitation of a country's comparative advantage, which means that trade

encourages a country to specialise in producing only those goods and services which
it can produce more effectively and efficiently, and at the lowest opportunity
2. Producing a narrow range of goods and services for the domestic and export market
means that a country can produce in at higher volumes, which provides further cost
benefits in terms of economies of scale.
3. Trade increases competition and lowers world prices, which provides benefits to
consumers by raising the purchasing power of their own income, and leads a rise
in consumer surplus.
4. Trade also breaks down domestic monopolies, which face competition from more
efficient foreign firms.3

3
http://www.economicsonline.co.uk/Global_economics/Why_do_countries_trade.html

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 5. The quality of goods and services is likely to increases as competition encourages
innovation, design and the application of new technologies. Trade will also encourage
the transfer between countries.
6. Trade is also likely to increase employment, given that employment is closely related
to production. Trade means that more will be employed in the export sector and,
through the multiplier process, more jobs will be created across the whole economy.

DISADVANTAGES OF INTERNATIONAL TRADE

Despite the benefits, trade can also bring some disadvantages, including:

1. Trade can lead to over-specialisation, with workers at risk of losing their jobs should
world demand fall or when goods for domestic consumption can be produced more
cheaply abroad. Jobs lost through such changes cause severe structural
unemployment. The recent credit crunch has exposed the inherent dangers in over-
specialisation for the UK, with its reliance on its financial services sector.
2. Certain industries do not get a chance to grow because they face competition from
more established foreign firms, such as new infant industries which may find it
difficult to establish themselves.
3. Local producers, who may supply a unique product tailored to meet the needs of the
domestic market, may suffer because cheaper imports may destroy their market. Over
time, the diversity of output in an economy may diminish as local producers leave the
market.

CONCLUSION

International trade can also further cultural ends. Trade involving fine arts, crafts, or luxury
items is wholesome since it facilitates the healthy interpenetration of cultures. Such items are
also helpful to those in leadership positions or elites who, by force of their functions, need to
understand the distinct mentality of those in other nations. Adopting a calculated
cosmopolitan attitude facilitates this process without harming the distinctive local character
of the person.

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Thus, international trade should and must exist. It should be both ample and common,
especially when satisfying basic needs. However, it should not dominate or destroy local
culture and production.4

WEBLIOGRAPHY

1. http://www.returntoorder.org/2015/10/the-need-for-international-trade/ ON 29/03/2017
@ 5:00 p.m.

2. http://www.economicsonline.co.uk/Global_economics/Why_do_countries_trade.html ON
29/03/2017 @ 5:20 p.m.

3. http://www.investopedia.com/articles/03/112503.asp ON 29/03/2017 @ 5:30 p.m.

4. http://catalog.flatworldknowledge.com/bookhub/28?e=fwk-61960-ch02_s01 ON
29/03/2017 @ 5:40 p.m.

4
http://www.returntoorder.org/2015/10/the-need-for-international-trade/

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