Meaning and Reasons for International Trade

Meaning of International Trade

International trade is referred to as the exchange or trade of goods and services between different nations. This kind of trade contributes and increases the world economy. The most commonly traded commodities are television sets, clothes, machinery, capital goods, food, raw material, etc.

International trade has exceptionally increased, which includes services such as foreign transportation, travel and tourism, banking, warehousing, communication, distribution, and advertising. Other equally important developments are the increase in foreign investments and production of foreign goods and services in an international country.

These foreign investments and productions help companies to come closer to their international customers, thus serving them with goods and services at a very low rate.

All the mentioned activities are parts of international business. It can be concluded by saying that international trade and production are two aspects of international business, which is growing day by day across the globe.

Also read: What is the Difference between Trade and Commerce?

Reasons for International Trade

(1) Production

  •       It is not possible for every single country to produce equally at a cheap cost.
  •       That is why international trade is taken into account.

(2) Factors of production

  •       Factors of production include labour, capital, and raw material for producing goods and services that are available at different rates in different countries.

(3) Cost of production

  •       Each country finds it advantageous to produce only those goods and services that can be produced efficiently.
  • The rest of the activities are assigned to other countries at a lower cost.

(4) Resource distribution

  •       Many times, companies face problems due to the limitation of natural resources.
  •       There is an unequal distribution of the resources in the country.

(5) Examples

  •       Different countries are specialised in different sectors like in India, Maharashtra is involved in textiles, West Bengal in jute products, Haryana and Punjab in food products, Kerala in spices, etc.
  •       Same is categorised for other countries.
Links to Explore

       What is Import Trade?

       What is Export Trade?

Importance of International Trade

International trade between various nations is an essential factor that is responsible for the increase in the standard of living, creating employment, and empowering consumers to enjoy different kinds of goods. Few other important factors that are influenced by international trade are:

 Utilisation of raw materials: Some countries are naturally blessed with an abundance of raw materials, like  Qatar is for oil, Iceland for metals and fish, etc. Without international trade, these countries would never benefit from their natural resources or raw materials.

Greater choice for consumers: More international trade results in more choices of products.

Specialisation and economies of scale – greater efficiency: This means that it does not matter what a country is specialised in, and the essential thing is to pursue a specialisation that allows companies to make a profit that outweighs most of the other factors.

Global growth and economic development: International trade influences the economic growth of a country. This increase also leads to the reduction of poverty levels.

Scope of International Business

(1) Exports and Imports

  •       They include merchandise (tangible or having physical existence) of goods.
  •       Export merchandise means sending goods to other nations.
  •       Import merchandise means receiving goods from other nations.
  •       They include the trade of services.

(2) Service trade

  •       It is also known as invisible trade.
  •       It includes the trade of services (intangible or no physical existence).
  •       There is both export and import of services.
  •       It includes services like tourism, hotel, transportation, training, research, etc.

(3) Licensing and Franchising

  •       Under this, permission is given to the organisations of other countries.
  •       It includes selling the product of a particular company.
  •       Under its trademark, patents are given in return of some fees. Example: Pepsi and Coca Cola are produced and sold through different sellers abroad.
  •       Franchising is similar to licensing, but franchising is associated with services. Example: Dominos, Burger King, etc.

(4) Foreign investment

It includes the investment of available funds in foreign companies to get returns. It can be of two types:

(1) Direct investment means investing funds in plant and machinery for marketing and production, also known as a foreign direct investment (FDI). Sometimes, these investments are done jointly and are known as joint ventures.

(2) Portfolio investment means one company invests in another company by way of investing in its securities and earning income in the form of interests and dividends.

Advantages of International Business

(1) Income

  •       It helps in earning foreign exchange to the organisations.
  •       Forex helps in paying off the cost of imports of capital goods, technologies, fertilisers, etc., from abroad.

(2) Efficient resources

  •  Under international trade, countries produce what they can produce efficiently and leave the other activities to nations in which they can work efficiently.
  • This helps different nations to distribute the activities and work efficiently in their areas.

(3) Growth and employment potentials

  • International trade helps in faster growth of organisations as well as countries.
  • Sometimes, organisations are not able to create employment in the market as they produce on a small scale.
  • Initially, countries like China, Japan, and South Korea took the whole world as a single market for trade.
  • This helped them in employment generation across the world.

(4) Standard of living

  •       People in one country are able to enjoy goods and services of other nations.
  •       This helps them in improving the standard of living.

Difference between Domestic and International Trade

Parameters Domestic trade International trade
Nationality of buyers and sellers Under this, people of one nation work in their respective domestic market. Under this, people from different nations work in the international market.
Nationality of other stakeholders Stakeholders like suppliers, producers, employees, middlemen, etc., are of the same nation. Stakeholders like suppliers, producers, employees, middlemen, etc., are of different nations.
Mobility of factors of production Factors of production like capital and labour are mobile across one nation. Factors of production like capital and labour are mobile across the different nations.
Heterogeneous customers Usually, customers are homogeneous in the domestic market. Customers are not homogeneous in the international market due to different religion, caste, language, etc.
Risks Under this, a nation is subjected to the political risks within the nation. This may be a barrier to international trade as different nations have different political risks.
Policies It is subjected to different policies and regulations, and laws of a single nation. It is subjected to different policies and regulations, and laws of multiple nations.
Currency Only one currency is involved. There is involvement of more than one currency.

Advantages and Disadvantages of Licensing and Franchising

Advantages of licensing and franchising

(1) Nature

  •  Under this system, a licensor/franchisor invests their own money in setting up their business
  •  There is no cost of investing the funds abroad.
  •  So, it is less expensive than other modes.

(2) Interventions

  •  The whole business is owned and managed by local people.
  •  The government interventions or takeovers do not take place.

(3) Existing contracts

  • Since the business under licensing or franchising is managed by local people, its existing contacts become helpful in marketing operations.

Disadvantages of licensing and franchising

(1) Competition

  •       When the brand becomes popular after licensing or franchising, there is the threat of substitute products having a slight difference.
  •       So, it increases the competition.

(2) Secrecy

  •       If the business is not transacted properly, the confidential information can be leaked to competitors in the foreign market due to which the licensor can suffer stiff competition or losses.

(3) Litigations

  •       It is of no doubt that, conflicts arise among the licensor and the licensee on the factors like maintenance of accounts, payment of royalty, etc.
  •       This can lead to costly and long litigation.

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  1. Vital information, the explanation is very clear.