International Trade: The Importance Of Foreign Trade

“I think every country has to recognize its competitive advantage and liberate its strengths to be a partner in global trade, and that 's the only way you can survive and succeed.”

- N. R. Narayana Murthy, Founder Infosys

International Trade, External Trade or Foreign Trade has only increased in scope and impact in the world today.

1.1.1.(i) Meaning of Foreign Trade:

Trade is the lifeline of a nation. What does the term Foreign Trade mean? It is simply the trade carried on between two or more countries. It is an exchange of capital, goods and services across international borders. This kind of trade can be undertaken by an individual or by the Government of a country.

Need and Importance of Foreign Trade:

What is the need for countries

The people, their skills – inherent and learnt, availability of raw material, climatic conditions give countries an advantage over others. This is another reason that necessitates Foreign Trade.

Economic Development

There is often diversity in the economic growth rate of different countries. While some countries are developed, some are underdeveloped and some others are developing. Underdeveloped and developing countries depend on for capital which further increases the need for Foreign Trade.

Theory of Comparative Cost

The theory of comparative cost states that a country must focus on what it can produce, depending on its natural resources, human resources and economics, at the lowest cost possible. This promotes ideal division of labour and international specialization leading to better standard of living across countries all over the world. In this manner, the theory of comparative cost encourages Foreign

Figure 1.1.3: Need for Foreign Trade

The four major factors that necessitate Foreign Trade

1.1.1.(ii) Nature of Foreign Trade:

The three categories of Foreign Trade –

• Import

• When a country sources and buys goods or services from another country it is termed as import trade.

For example – India imports electronic goods from China

• Export

• When a country sells its goods and services to another country thereby sending the goods and/or services from the home country to another country it is termed as export trade.

For example – India exports iron ore to China

• Entrepot

• It is also known as “Re exports”. It is when a country imports goods from another country and then sells it to a different country.This involves both import and export.

For example – India may import oil from Iraq and export some of it to Bhutan Figure 1.1.4: Categories of Foreign Trade

Import, Export and Entrepot are the three categories of Foreign Trade

Economies of the world today have come to realize the huge positive impact that Foreign Trade can have on their growth if regulated wisely. The Foreign Trade policies of a country can make or break its economy furthering or hindering its