International Trade (Introduction) PDF

International Trade (introduction) Meaning of Business A business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities. Businesses can be for- profit entities or non-profit organizations. Business types range from limit...

International Trade (introduction) Meaning of Business A business is defined as an organization or enterprising entity engaged in commercial, industrial, or professional activities. Businesses can be for- profit entities or non-profit organizations. Business types range from limited liability companies, sole proprietorships, corporations, and partnerships. There are businesses that run as small operations in a single industry while others are large operations that spread across many industries around the world.  What Is Trade? Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. Trade can take place within an economy between producers and consumers. What is international trade? International Trade refers to the exchange of products and services from one country to another. In other words, imports and exports. International trade consists of goods and services moving in two directions: 1. Imports – flowing into a country from abroad. 2. Exports – flowing out of a country and sold overseas.  Visible trade refers to the buying and selling of goods – solid, tangible things – between countries. Invisible trade, on the other hand, refers to services. Most economists globally agree that international trade helps boost nations’ wealth. When a person or company purchases a cheaper product or service from another country, living standards in both nations rise. There are several reasons why we buy things from foreign suppliers. Perhaps, the imported options are cheaper. Their quality may also be better, as well as their availability. The exporter also benefits from sales that would not be possible The term ‘commerce’ is often if it solely sold to its own (not always) used when market. The exporter may also referring to the buying and earn foreign currency. It can selling of goods and services subsequently use that foreign internationally. currency to import things. Historical background Adam Smith (1723-1790), a Scottish moral philosopher and pioneer of political economy, believed in international trade. Many economists today call Smith the ‘father of modern economics.’ Why does international trade exist? Nations trade internationally when there are not sufficient resources or capacity to satisfy domestic needs and wants domestically. By developing and exploiting (utilizing) their domestic resources, countries can produce a surplus. They may use this surplus to buy goods they need from abroad, i.e., through international trade. International economics? In other words, international International economics deals economics is a field concerned It studies economic and political with the economic activities of with economic interactions of issues related to international various countries and their countries and effect of trade and finance. consequences. international issues on the world economic activity. On the other hand, International trade involves international finance studies the exchange of goods or the flow of financial assets or services and other factors of investment across borders. production, such as labor and International trade and finance capital, across international became possible across nations borders. only due to the emergence of globalization. Concept International economics refers to a study of international forces that influence the domestic conditions of an economy and shape the economic relationship between countries. In other words, it studies the economic interdependence between countries and its effects on economy. The scope of international economics is wide as it includes various concepts, such as globalization, gains from trade, pattern of trade, balance of payments, and FDI. Apart from this, international economics describes production, trade, and investment between countries.  By internal or domestic trade are meant transactions taking place within the geographical boundaries of a nation or region. Trade within the territory (political boundary) of a nation “internal” trade. It is also known as intra- regional or home trade.  International trade, thus, refers to the exchange of goods and services between one country or region and another. It is also sometimes known as “inter- regional” or “foreign” trade. Briefly, trade between one nation and another is called “international” trade, For all practical purposes, trade or exchange of goods between two or more countries is called “international” or “foreign” trade. Thus, International trade, is trade among different countries or trade across political frontiers. Why International trade? 1. Human wants and countries’ resources do not totally coincide. Hence, there tends to be interdependence on a large scale. 2. Factor endowments in different countries differ. 3. Technological advancement of different countries differs. Thus, some countries are better placed in one kind of production and some others superior in some other kind of production. 4. labor and entrepreneurial skills differ in different countries. 5. Factors of production are highly immobile between countries. In short, international trade is the outcome of territorial division of labor and specialization in the countries of the world. Distinguishing features of international trade: (1) Immobility of Factors: The degree of immobility of factors like labor and capital is generally greater between countries than within a country. Immigration laws, citizenship, qualifications, etc. often restrict the international mobility of labor. International capital flows are prohibited or severely limited by different governments. Consequently, the economic significance of such mobility of factors tends to equality within but not between countries. For instance, wages may be equal in Mumbai and Pune but not in Bombay and London. In this context, it may be pointed out that the price of a commodity in the country where it is produced tends to equal its cost of production.  The reason is that if in an industry the price is higher than its cost, resources will flow into it from other industries, output will increase and the price will fall until it is equal to the cost of production. Conversely, resources will flow out of the industry, output will decline, the price will go up and ultimately equal the cost of production. But, as among different countries, resources are comparatively immobile; hence, there is no automatic influence equalising price and costs. Therefore, there may be permanent difference between the cost of production of a commodity. For instance, the price of tea in India must, in the long run, be equal to its cost of production in India. But in the U.K., the price of Indian tea may be permanently higher than its cost of production in India. In this way, international trade differs from home trade. (2) Heterogeneous Markets: In the international economy, world markets lack homogeneity on account of differences in climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different. (3) Different National Groups: International trade takes place between differently cohered groups. The socio- economic environment differs greatly among different nations. (4) Different Political Units: International trade is a phenomenon which occurs amongst different political units.  (5) Different National Policies and Government Intervention: Economic and political policies differ from one country to another. Policies pertaining to trade, commerce, export and import, taxation, etc., also differ widely among countries though they are more or less uniform within the country. Tariff policy, import quota system, subsidies and other controls adopted by governments interfere with the course of normal trade between one country and another. (6) Different Currencies: Another notable feature of international trade is that it involves the use of different types of currencies. So, each country has its own policy in regard to exchange rates and foreign exchange. Domestic v/s International Trade BASIS FOR COMPARISON DOMESTIC BUSINESS INTERNATIONAL BUSINESS Meaning A business is said to be domestic, when its International business is one which is economic transactions are conducted within engaged in economic transaction with the geographical boundaries of the country. several countries in the world. Area of operation Within the country Whole world Quality standards Quite low Very high Deals in Single currency Multiple currencies Capital investment Less Huge Restrictions Few Many Nature of customers Homogeneous Heterogeneous Business research It can be conducted easily. It is difficult to conduct research. Mobility of factors of production Free Restricted Conclusion Carrying out the activities of international business and its management is far more difficult than conducting a domestic business. Due to changes in political, economic, socio-cultural environment across the nations, most business entities find it difficult to expand their business globally. To become a successful player in the international market firms need to plan their business strategies as per the requirement of the foreign market.