What is International Trade?
International trade plays a vital role in an economy, helping to increase its Gross Domestic Product or GDP by a substantial margin. In turn, it is responsible for facilitating both growth and economic development which is not limited to just one nation. With the emergence of newer technology, better means of communication and enhanced infrastructure, tapping into the potential of international trade has become easier. On that note, let’s check out the meaning of international business and all about its crucial aspects! What is International Trade? As per the definition of international business, it is described as the sale and purchase of goods and services which is not limited to a country’s geographical boundaries. It is also known as “trade between two countries '. Notably, it does not just involve the movement of goods and services internationally. It also includes factors like capital, intellectual property and technology, among others. There are three types of international trade –ImportExportEntrepot or Re-export Features of International Trade These pointers below highlight the nature of international business –Intense competition. Existence of several mediators. Regional specialization is the basis of international trade. Adherence to both local and International Laws. Exposure to government control. Lengthy documentation process. Buyers and sellers are separated based on their country. Unanimously accepted currency is used.
Test Your Knowledge: Which of these Items is not Exported by India?
a) Basmati rice
b) Gems and jewelry
c) Oil and petroleum
d) Textile
Do you Know the Reasons Why Countries Indulge in International Business?
Typically, there are 4 major reasons for international trade –
Production Since countries on their own would fail to produce quality products at a reasonable cost, they are independent of one another significantly.
Unequal Distribution of Resources Resources are limited. Also, not all geographical regions are blessed with substantial resources to produce everything the consumers need.
Factors of Production Cost of factors of production like raw material, capital, labor, etc. are available at different rates in different countries.
Cost of Production The cost of production tends to vary from one region to another.
The primary reason behind it is the disparity in the concentration of available resources, along with the cost of factors of production in different areas. These encourage producers to make the most of production-friendly aspects of other regions through trade. In turn, it paves the way for internal trade across countries. With that being said, let’s now try to weigh the importance of international trade by analyzing its pros. Advantages of International Trade Here are some of the significant benefits of international trade on nations and producers –A. For NationsForeign Exchange EarningsInternational business helps to generate foreign exchange which comes in handy for meeting future requirements pertaining to cost-effective factors of production. Optimal Use of Resources International trade encourages specialization in production. In such a setup a country only produces goods and services it has enough resources for, and trades the surplus with other countries. This, in turn, ensures optimal use of available resources and further helps distribute goods and services across the globe. Improvement in Both Growth and Employment OpportunitiesMost developing countries serve as an excellent source of factors of production, which includes land, labor, technology and capital. International businesses do not just benefit their firm’s production but in turn, helps generate sample employment opportunities for the locales. Improvement in Living StandardsSuch a trade set up enables consumers to enjoy a vast selection of goods and services. It offers them ample choice. Resultantly, it enhances their standard of living as well. B. Business FirmsIncrease in Production Capacity. The international business enables producers to make the most of their production capacity and tap into the economies of scale. In turn, it helps them to increase their profit margin on each unit of a product significantly while indirectly helping to lower the overall cost of production. Greater EarningsIn most situations, international business is considered to be relatively more profitable than domestic trade. In a situation wherein the cost of goods and services are low in the domestic market, business owners can earn more by selling them in foreign markets. Significant Growth Prospect Business firms who operate exclusively within the national boundaries are often facing stagnation in the demand of their goods. On the other hand, firms who partake in international trade have a greater opportunity to expand their prospects and market their product internationally. Combats Competition It can be said that international trade serves as a means to facilitate growth for those firms which find themselves amidst throttling market competition. It proves useful in escaping the intense competition of the domestic market.
Task 1 – Find out the disadvantages of international business and list them accordingly in your own words! Scope and Importance of International BusinessNow let’s quickly glance through the scope and importance of international business.Scope of International TradeExport and import of merchandiseExport and import of servicesForeign investment - direct investment and portfolio investment licensing and franchising
Task 2 – Find out about the different modes of entering into international trade. Subsequently, learn about their advantages and disadvantages. Significance of International Trade. These pointers offer an overview of the significance of the concept of international trade –Aids in effective utilization of available raw material.It provides consumers with ample choices.
Helps to specialize and economize the scale of production. It promotes the growth and development of the global economy. Find out about the basic difference in the domestic and international business meaning and much more from this table below.
Differences Between Domestic Trade and International Trade Parameters International Business Domestic Business Buyers’ and sellers’ nationalities do not belong to the same country. They belong to the same country mobility of production factors there are certain restrictions on mobility. They can move freely within the boundaries of their country. Market composition It lacks homogeneity. Significantly more homogenous. Political system It has to adhere to the political system of several countries.It is subjected to the political system of one country. In case you want to learn more about international trade definition, refer to Vedantu’s study materials and improve your knowledge significantly. Also, by joining our free live online classes, you would gain more insight into the nature and scope of international business and benefit your exam preparation. Download our Vedantu App now!
All About International Trade by Vedantu
International trade is studied in depth in Class 11, in the NCERT books prescribed by the Central Board of secondary education. It is a part of business studies that constitutes a major part of commerce. International trade is the significant weightage in the examinations and it is therefore extremely vital to understand this topic in depth. The international trade of a country is largely responsible for the increase or decrease of the gross domestic product or GDP.
These key concepts are explained in detail in Chapter 11 international business, students who want to get a good hold over these concepts and want to study in a much-simplified manner, students can refer to the sign was provided by Vedanta, The notes provided by Vedanta cover all the important aspects needed to understand the topic of international trade. What is studying the notes provided by Vedanta students will have knowledge about the meaning of international business we will be able to differentiate between internal and international business, scope and benefits of international business, they will know the particular documents that are required for import and export transactions, knowing incentives and schemes is also a major part of international business, what role organizations play in the promotion of international business, Will know the major international institutions and agreements at the global level which are responsible for promoting international trade and development.
In simple words, international trade can be defined as the exchange of goods and services that takes place among countries across national boundaries. Countries who cannot produce certain commodities on their own can buy from other countries or trade their material to obtain commodities. The very first form of trade that ever took place in primitive societies was called the barter system, in which the direct exchange of goods and services used to take place among buyers and sellers. International trade is important in the sense that it benefits the world economy. Countries that specialize in production and division of labor can give rise to trade. Any kind of specialization can help increase international trade. International trade is the product of globalization that has made living easier for people across nations.
Key Concepts that are Studied Along with International Trade are
Meaning of international business,
Reason for international business,
International business versus domestic business,
Scope of international business,
Benefits of international business,
Benefits to countries,
Benefits to firms,
Modes of entry into international business,
Exporting and importing,
Contract manufacturing,
Advantages, limitations,
Licensing and franchising,
Joint ventures,
Wholly owned subsidiaries ,
Export import procedures and documentation,
Export procedure,
Import procedure,
Foreign trade promotion incentives and organizational support,
Foreign trade promotion measures and schemes,
Organizational support,
International trade institutions and trade agreements,
World Bank,
International monetary fund,
Functions of IMF,
World Trade Organization and major agreements,
Objectives of world trade organization,
FAQs on International Trade: Meaning and Importance
1. What is international trade and what does it involve?
International trade refers to the exchange of goods, services, and capital across national borders. It is not limited to the sale and purchase of physical products but also includes the movement of technology, intellectual property like patents, and services such as tourism and banking. This trade between two or more countries is a fundamental component of the global economy.
2. What are the three main types of international trade?
The three principal types of international trade are:
- Import Trade: This involves purchasing goods and services from a foreign country to be used in the domestic country.
- Export Trade: This involves selling domestically produced goods and services to buyers in another country.
- Entrepot Trade (Re-export): This is when a country imports goods not for domestic consumption, but with the specific purpose of processing or re-packaging them and then exporting them to another country.
3. What is the importance of international trade for a country's economy?
International trade is crucial for a nation's economic health for several reasons:
- Earning Foreign Exchange: It helps a country accumulate foreign currency, which is essential for paying for imports and other international transactions.
- Optimal Use of Resources: It allows a country to specialise in producing goods where it has a comparative advantage, leading to efficient use of its natural resources.
- Economic Growth and Employment: By opening up new markets, it boosts production, which in turn can lead to higher GDP and create more employment opportunities.
- Improved Standard of Living: It provides consumers with a wider variety of goods and services, often at lower prices, which enhances their quality of life.
4. How does engaging in international trade benefit individual business firms?
For individual business firms, international trade offers several significant advantages:
- Increased Production Capacity: Access to global markets allows firms to increase their production and benefit from economies of scale, lowering the cost per unit.
- Higher Profit Potential: Firms can often earn higher profits by selling their products in foreign markets where prices may be higher than in the domestic market.
- Growth Prospects: When domestic demand stagnates, international markets offer new opportunities for expansion and growth.
- Reduced Competition: It provides a strategic way for firms to escape intense competition in their home market.
5. What are the key differences between international trade and domestic trade?
International and domestic trade differ primarily in their scope and complexity:
- Nationality: In domestic trade, buyers and sellers are from the same country. In international trade, they are from different countries.
- Mobility of Factors: Factors of production like labour and capital can move freely within a country, but their movement is restricted across national borders.
- Currency: Domestic trade uses the national currency, whereas international trade involves the exchange of multiple foreign currencies.
- Regulatory Environment: International trade must comply with the laws, tariffs, and political systems of multiple countries, making it far more complex than domestic trade, which operates under a single legal system.
6. Why do countries engage in international trade instead of producing all goods themselves?
Countries engage in international trade primarily because it is more efficient and beneficial than attempting to be self-sufficient. The main reasons are:
- Unequal Distribution of Resources: Natural resources, climate, and skilled labour are not distributed equally around the world. Trade allows countries to acquire resources they lack.
- Principle of Specialisation: Countries can specialise in producing goods and services that they can make most efficiently and at the lowest cost. They can then trade their surplus for goods that other countries produce more efficiently.
- Cost Efficiency: It is often cheaper for a country to import certain goods than to produce them domestically due to differences in labour costs, technology, and resource availability.
7. What are some common barriers that can restrict international trade?
Governments sometimes impose barriers to protect domestic industries or for political reasons. The most common barriers include:
- Tariffs: A tax imposed on imported goods, making them more expensive for domestic consumers and less competitive with local products.
- Quotas: A quantitative limit on the amount of a specific good that can be imported into a country during a given period.
- Embargo: A complete ban on the import or export of certain products, or a total ban on trade with a particular country, often for political reasons.
- Subsidies: Financial assistance provided by a government to its domestic producers, which lowers their costs and helps them compete against foreign imports.
