What is International Trade?
Definition: International trade is an economy’s ability to exchange goods and services in exchange for value, usually monetary and the circulation of resources across borders.
How Does International Trade Work?
International trade happens when countries trade with each other so that a c important not only for traders but also for governments. International trade contributes to a country’s GDP, especially if the country exports a variety of its local products.
International trade is important because it allows goods and services to reach a wider market. That way, products from one country can reach a different country where there is a demand for those products.
International Trade Example
For example, Brazil might import bananas into the U.S where there is a huge market in the U.S. but then again the U.S also produces various things such as electronic devices, which are then sold in multiple countries. This kind of trade constitutes global or international trade and it also contributes towards creating wealth for each country.
A country with a higher GDP tends to have more wealth than a country with a lower GDP and this has an impact on the society in terms of wealth creation and distribution. A country thus works towards maintaining a favorable balance of payments between its imports and exports.
International Trade Advantages
Efficiency
It allows wealthy countries to utilize their resources more efficiently. Countries that are rich in resources like technology, capital and skilled labor among others and this allows such countries to produce products more efficiently than other countries. Those that are not able to produce their own products purchase them from other countries.
Specialization
Specialization allows the company to play by its strengths. International trade allows countries to identify the things that they can easily produce and so when they identify their strong areas, they can then focus on those areas through specialization.
Balance Opportunity Costs
International trade helps to balance out the opportunity costs that occur when countries are good at producing some things and are not good at producing others. Specializing in various products and not producing others provides a situation where the country is able to lower its opportunity cost. Specialization promotes a higher degree of efficiency where the production process may end up being highly automated, thus allowing for faster production. The latter would also allow countries to ramp up production to overcome the opportunity cost.
Foreign Direct Investment
One of the major advantages of international trading is that it may fuel more foreign direct investment. This is because international trade allows countries to be part of the global economy and this collaborative spirit encourages foreign investment.
Comparative Advantage in International Trade
International trade is also one of the major reasons behind the concept of comparative advantage. The latter refers to instances where countries trade based on their strong suits. This is where some countries decide to stop producing certain products because producing them would be slower and more resource-intensive than procuring the same product from another country. Meanwhile, the country that abandons the production of various products may shift its focus towards other products in which the country is highly specialized. Comparative advantage is therefore one of the major factors that contribute to international trade.
Governments from all over the world view comparative advantage as an important aspect of achieving success in international trade. This would explain why a government would impose a tariff so that it can give the advantage to locally made products as opposed to similar products imported from other countries. Comparative advantage is also another reason behind the impact of protectionist measures or international trade agreements on the job market and even the performance of various industries.
Despite the measures taken to shield against the protectionist measures, specialization proves to be a major advantage. If a country is able to undercut the opportunity cost that occurs due to the decision to stop producing some other products, then it lends itself to an advantageous position over its neighboring countries.