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Introduction
The barter of goods or services among different peoples is an age-old practice,

probably as old as human history. International trade, however, refers specifically
to an exchange between members of different nations, and accounts and
explanations of such trade begin (despite fragmentary earlier discussion) only with
the rise of the modern nation-state at the close of the European Middle Ages. As
political thinkers and philosophers began to examine the nature and function of the
nation, trade with other countries became a particular topic of their inquiry. It is,
accordingly, no surprise to find one of the earliest attempts to describe the function
of international trade within that highly nationalistic body of thought now known
as mercantilism.
International trade represents a growing share of global output, and growth in trade
is expected to outstrip overall growth in output for the foreseeable future. On the
basis of current trends, international trade may grow to the equivalent of 30 percent
of world output by 2010 (from its current level of around 15 percent). The rising
significance of trade is a consequence of the increasing integration of the global
economy. Legal and cultural obstacles to trade are diminishing at the same time as
the motivation to trade is increasing. Integration is occurring both at the regional
level, through initiatives such as NAFTA and the European Union (EU) Single
Market, and at the global level, supported by the continuing evolution of WTO.
International trade is the physical movement and electronic transfer of goods and
services across national borders. It includes the movement of commodities, such as
natural resources and manufactured goods, and the transfer of services, such as
personal and commercial data, banking and financial transactions, and various
other kinds of professional and business-related activities. These are important
because they link local, regional, and national economies with the global economy,
and in so doing serve as a conduit for the international diffusion and exchange of
ideas and information, culture, technology, social and political institutions,
managerial know-how, business cycles, and capital investment funds
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.
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.
Why countries trade

Ricardo observed that trade was driven by comparative rather than absolute costs
(of producing a good). One country may be more productive than others in all
goods, in the sense that it can produce any good using fewer inputs (such as capital
and labor) than other countries require to produce the same good.
Ricardo’s insight was that such a country would still benefit from trading
according to its comparative advantage—exporting products in which its absolute
advantage was greatest, and importing products in which its absolute advantage
was comparatively less (even if still positive).
1. A country may be twice as productive as its trading partners in making

clothing, but if it is three times as productive in making steel or building airplanes,
it will benefit from making and exporting these products and importing clothes. Its
partner will gain by exporting clothes—in which it has a comparative but not
absolute advantage—in exchange for these other products (see box). The notion
extends beyond physical goods to trade in services—such as writing computer
code or providing financial products. Because of comparative advantage, trade
raises the living standards of both countries.
2. Differences in comparative advantage may arise for several reasons. In the

early 20th century, Swedish economists Eli Heckscher and Bertil Ohlin identified
the role of labor and capital, so-called factor endowments, as a determinant. The
Heckscher-Ohlin proposition maintains that countries tend to export goods whose
production uses intensively the factor of production that is relatively abundant in
the country. Countries well endowed with capital—such as factories and
machinery—should export capital-intensive products; those well endowed with
labor should export labor-intensive products. Economists today think that there are
also other important influences on trade patterns (Baldwin 2008).
3. Recent research finds that episodes of trade opening are followed by

adjustment not only across industries, but within them as well. Greater competition
from foreign firms puts pressure on profits, forcing less efficient firms to contract
and making room for more efficient firms. Expansion and new entry bring better
technologies and new product varieties. Likely most important, trade enables
greater selection across different types of goods (say refrigerators). This explains
why there is a lot of intra-industry trade (for example, countries that export
household refrigerators may import industrial coolers), which the factor
endowment approach ignores.
4. There are clear efficiency benefits from trade that results in more products—
not only more of the same products, but greater product variety. For example, the
United States imports four times as many varieties (such as different types of cars)
as it did in the 1970s, while the number of countries supplying each good has
doubled. Even more beneficial may be the more efficient investment spending
when firms have access to a wider variety and quality of intermediate and capital
inputs (think industrial optical lenses rather than cars). By enhancing overall
investment and facilitating innovation, trade can bring sustained higher growth.
5. Economic models that assess the impact of trade typically neglect

technology transfer and pro-competitive forces such as greater product variety
because these are difficult to model, and results that do incorporate them are
subject to greater uncertainty. Where this has been done, however, researchers
have concluded that the benefits of trade reforms—such as reducing tariffs and
other nontariff barriers to trade—are much larger than suggested by conventional
models.
Rationale behind International Trade

Reduced dependence on your local market
Your home market may be struggling due to economic pressures, but if you go
global, you will have immediate access to a practically unlimited range of
customers in areas where there is more money available to spend, and because
different cultures have different wants and needs, you can diversify your product
range to take advantage of these differences.
Increased chances of success
Unless you’ve got your pricing wrong, the higher the volume of products you sell,
the more profit you make, and overseas trade is an obvious way to increase sales.
In support of this, UK Trade and Investment (UKTI) claim that companies who go
global are 12% more likely to survive and excel than those who choose not to
export.
Increased efficiency
Benefit from the economies of scale that the export of your goods can bring – go
global and profitably use up any excess capacity in your business, smoothing the
load and avoiding the seasonal peaks and troughs that are the bane of the
production manager’s life.
Increased productivity
Statistics from UK Trade and Investment (UKTI) state that companies involved in
overseas trade can improve their productivity by 34% – imagine that, over a third
more with no increase in plant.
Economic advantage
Take advantage of currency fluctuations – export when the value of the pound
sterling is low against other currencies, and reap the very real benefits. Words of
warning though; watch out for import tariffs in the country you are exporting to,
and keep an eye on the value of sterling. You don’t want to be caught out by any
sudden upsurge in the value of the pound, or you could lose all the profit you have
worked so hard to gain.
Innovation
Because you are exporting to a wider range of customers, you will also gain a
wider range of feedback about your products, and this can lead to real benefits. In
fact, UKTI statistics show that businesses believe that exporting leads to
innovation – increases in break-through product development to solve problems
and meet the needs of the wider customer base. 53% of businesses they spoke to
said that a new product or service has evolved because of their overseas trade.
Growth
The holy grail for any business, and something that has been lacking for a long
time in our manufacturing industries – more overseas trade = increased growth
opportunities, to benefit both your business and our economy as a whole.
References:
Baldwin Robert E. 2008. The Development and Testing of Heckscher-Ohlin Trade
Models: A Review. Cambridge, MA: MIT Press.
Elliott, Kimberley Ann. 2009. “Opening Markets for Poor Countries: Are We
There Yet?” Center or Global Development Working Paper 184,
Washington.
IMF, World Bank, and World Trade Organization. 2017. “Making Trade an Engine
of Growth for All: The Case for Trade and for Policies to Facilitate
Adjustment.”
Kee, Hiau Looi, Alessandro Nicita, and Marcelo Olarreaga. 2006. “Estimating
Trade Restrictiveness Indices,” World Bank Policy Research Working Paper
No. 3840. Washington.

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Introduction

The barter of goods or services among different peoples is an age-old practice,

Meaning of International Trade

International trade is referred to as the exchange or trade of goods and services

International trade has exceptionally increased, which includes services such as

International trade between various nations is an essential factor that is responsible

 Utilisation of raw materials: Some countries are naturally blessed with an

 Greater choice for consumers: More international trade results in more

 Specialisation and economies of scale – greater efficiency: This means

 Global growth and economic development: International trade influences

Why countries trade

1. A country may be twice as productive as its trading partners in making

2. Differences in comparative advantage may arise for several reasons. In the

3. Recent research finds that episodes of trade opening are followed by

5. Economic models that assess the impact of trade typically neglect

Rationale behind International Trade

Increased chances of success

Models: A Review. Cambridge, MA: MIT Press.

There Yet?” Center or Global Development Working Paper 184,

Trade Restrictiveness Indices,” World Bank Policy Research Working Paper

No. 3840. Washington.

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