THE IMPORTANCE OF INTERNALTIONAL TRADE IN AN ECONOMY

THE IMPORTANCE OF INTERNALTIONAL TRADE IN AN ECONOMY

Foreign trade, otherwise called international trade, is the exchange of goods and services between two or more countries. There is no country in the world today which produces all the commodities it needs. Every country, therefore, tries to produce those commodities in which it has comparative advantage. It exchanges part of those commodities with the commodities produced by other countries relatively more efficiently.

The importance of Foreign trade in an economy includes:

i.                   Market Expansion:  The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the producers. In Nigeria home market is very limited due to poverty. So it is necessary chat we should sell our product in other countries.

ii.                 Increase in Investment: Foreign trade encourages the investor to increase the investment to produce more goods. So, the rate of investment increases.

iii.              Foreign Exchange Earning:  Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes.

iv.              Price Stabilitily:  Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices.

v.                 Specialization:  There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through international trade.

vi.              Agricultural Development:  Agricultural development is the back bone in our economy. Foreign trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them.

vii.            Useful for the world peace:  today all the countries are tied in trade relations with each other. So, foreign trade also contribute to peace and prosperity in the world.

EXPLAIN THE DIFFERENCE BETWEEN INTERNATIONAL TRADE AND DOMESTIC TRADE

i.                    Mobility in Factor of Production

·        Domestic Trade: free to move around factors of production like land, labor, capital and labor capital and entrepreneurship from one state to another within the same country.

·        International trade: Quite restricted

ii.                  Language and Cultural Barriers

·        Domestic trade: speak same language and practice same culture.

·        International trade: communication challenges due to language and cultural barriers.

iii.               Movements of Goods

·        Domestic trade: easier to move goods without much restrictions. Maybe need to pay sales tax e.t.c.

·        International trade: Restricted due to complicated custom procedures and trade barriers like tariff, quotas or embargo.

iv.Broader markets

·        Domestic trade: limited market due to limits in population etc.

·        International trade: Broader markets

v.                   Usage of different currencies

·        Domestic trade: same type of currency is used

·        International trade: involves the use of different currencies

DISCUSS THE COST ADVANTAGE AND COMPARATIVE ADVANTAGE

ABSOLUTE COST ADVANTAGE

Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. Entities with absolute advantages can produce a product or service using a smaller number of inputs and/or using a more efficient process than another party producing the same product or service.

Absolute cost advantage is therefore the competitive advantage that a firm or a country obtains through cheaper inputs, innovation, proprietary know how, waste minimization, or other such means resulting in lower average costs.

COMPARATIVE COST ADVANTAGE

Comparative advantage was first described by David Ricardo who explained it in his 1817 book on the Principles of Political Economy and Taxation in an example involving England and Portugal.

          Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries.

The principle of comparative costs is based on the differences in production costs of similar commodities in different countries. Production costs differ in countries because of geographical division of labour and specialisation in production. Due to differences in climate, natural resources, geographical situation and efficiency of labour, a country can produce one commodity at a lower cost than the other.