Topic: International Trade
Table Of Contents
- Meaning Of International Trade
- Reasons For International Trade
What Is International Trade?
Different countries in the world engage in the production of different commodities because of differences in climatic condition, soil etc. Countries therefore engage in international trade to obtain the goods which they do not produce locally. Today, however, many countries buy from other countries they can’t produce themselves. This is because of the fact that countries specialize in the production of those commodities in which they have advantages over the other.
Therefore, International trade is the exchange of goods and services between one country and another or between different countries. It is also referred to external or foreign trade. The exchange is carried out between on country or another and the exchange makes it possible for countries who cannot produce goods at a low cost to import them for the better-ness of citizens.
Note:International trade is based on the theory of comparative cost which in turn is an extension of the principles of comparative advantages. This theory of comparative cost is first developed by ‘David Ricardo’ in the 19th century thus, principle of comparative cost can be illustrated with the aid of an example. In this, it may be necessary to assume that there are only two countries- Nigeria and Togo taking part in the exchange and that there are only two commodities: Rice and maize, let us suppose that a given cost of production in the two countries can produce the quantity of the commodity listed below:
Bags of rice produce by Nigeria = 60
Bags of rice produce by Togo = 30
Bags of maize produce by Nigeria = 20
Bags of maize produce by Togo = 50
Total of Bag of rice = 120 bags
Total bags of maize = 100 bags
through specialization the number of bags of rice and maize has by 30 bags respectively when exchange took place. Each country will benefit more by having more of the commodities.
Even in cases when a country can produce those two commodities cheaper, it is still advantageous to specialize in the production of one commodity so as to exchange it with another country who produce the other commodity. This is because, use of advantage which could result from it as illustrated below, let us suppose that Nigeria can produce both commodities cheaper than Togo and let the number of bags Nigeria can produce out the given cost be 50 bags of rice and 20 bags of maize, out of the game cost. Before the exchange takes place, the position of the two countries is shown below:
Bags of rice produce by Nigeria = 50
Bags of rice produce by Togo = 40
Bags of maize produced by both= None
Total Production For Both is = 90 bags.
If Nigeria specialises in rice production and Togo in the production of maize, the two countries stand to gain. Even if Nigeria specialises in the production of rice and at same time produces a little of maize, they will both gain in exchange.
Reasons For International Trade
There are many reasons why countries engage in international trade since no man is an island and no country is self-sufficient. So international trade is important. Those reasons includes:
1. Different Climatic Conditions: Different countries are located in different climatic zones and so produce different agricultural goods, Example: Wheat, intemperance region, cocoa, oil palm, timber in rain forest zone etc. So exchange becomes necessary between countries in different climatic zone.
2. To improve their standards of living.
3. Variation in level of Technology.
4. Necessity to trade due to self insufficiency.
5. Inadequate Capital: Some countries do not posses enough capital to tap their resources, so they depend on other countries for such resources.
6. In Even Distribution Of Production/Natural Resources: Some countries are endowed with abundant economic resources while others are not.