International Trade
International trade (foreign trade) refers to the buying and selling of goods and services between people of different countries. It involves exports and imports.
Importance of International Trade
- Availability of cheaper and better quality products
- Development of the agricultural sector
- Industrial development
- Development of competitive capacity
- Improvement in the living standard of people
- Increase in employment opportunities
- Increase in government revenue
- Expansion of the market
- Technological progress
- Good relations with foreign countries
Balance of Trade (BOT)
Balance of trade is the difference between the value of exports and imports of physical (visible) goods of a country during a given period.
- Trade Surplus: Exports exceed imports
- Trade Deficit: Imports exceed exports
- Balanced Trade: Exports equal imports
Balance of Payments (BOP)
Balance of payments is the systematic record of all economic transactions (receipts and payments) between a country and the rest of the world during a given period.
- Favourable Balance of Payments: Receipts exceed payments
- Unfavourable Balance of Payments: Payments exceed receipts
Structure / Components of Balance of Payments
- Current Account: Trade in goods and services, income, and current transfers
- Capital Account: Capital transfers and acquisition or disposal of non-produced assets
- Financial (Cash) Account: Foreign direct investment, portfolio investment, and reserve assets
Measures to Reduce Trade Deficit in Nepal
- Rapid industrialization
- Production of high-quality goods
- Formulation of proper trade policy
- Reduction in cost of production
- Publicity and advertisement of domestic products
- Diversification of trade
- Development of agriculture and hydroelectricity
- Increase in domestic production
Exchange Rate
The exchange rate is the rate at which one country’s currency can be exchanged for another country’s currency in the foreign exchange market.
- Flexible exchange rate
- Fixed exchange rate
- Spot exchange rate
- Forward exchange rate
- Long exchange rate
- Multiple exchange rate
- Two-tier exchange rate system
Free Trade
Free trade refers to international trade where the government does not impose restrictions on the import and export of goods and services.
Advantages of Free Trade
- Benefit of specialization
- Benefits to international consumers
- Promotion of healthy competition
- Expansion of market
- Gain of technology
- Gain of capital
- Increase in production
- Cheaper prices
Disadvantages of Free Trade
- Exhaustion of natural resources
- Adverse effect on domestic industries
- Economic dependency
- Dumping
- Import of harmful goods
- Reduction in savings and investment
- Economic crisis
Protectionism
Protectionism is a policy that protects domestic industries by restricting imports or providing facilities and support to domestic products.
Methods of Protection
- Tariff barriers
- Non-tariff barriers
Advantages of Protectionism
- Protection of infant industries
- Diversification of industries
- Generation of employment opportunities
- Correction of balance of payments
- Development of key industries
- Prevention of dumping
- National defense
- Preservation of natural resources
- Self-dependence
Disadvantages of Protectionism
- Creation of vested interests
- Perpetuation of inefficient industries
- Idleness in industries
- Burden on consumers
- Creation of monopoly
- Promotion of inequality
- Danger of retaliation
Comparative Advantage Theory of International Trade
David Ricardo propounded the Comparative Advantage Theory in 1815. Hence, it is also known as the Ricardian Theory or Comparative Cost Theory of international trade.
The theory states that countries should specialize in the production of goods in which they have lower comparative cost and trade with other countries.
Criticisms of Comparative Advantage Theory
- Assumption of two countries and two commodities is unrealistic
- Limitation of labour cost theory
- Assumption of similar tastes is unrealistic
- Returns to scale do not remain constant
- Transportation cost is ignored
- Assumption of homogeneous labour is wrong
- Mobility of factors of production is restricted
- Assumption of free trade is unrealistic
- Role of technology is ignored
- Complete specialization is not possible
Quick Exam Points
- International trade = exports + imports
- Trade surplus vs trade deficit vs balanced trade
- BOP includes Current, Capital, and Financial Accounts
- Free trade promotes specialization and cheaper prices
- Protectionism protects domestic industries
- Comparative advantage encourages specialization based on lower costs