If you walk into a supermarket and can buy South American bananas, Brazilian coffee and a bottle of South African wine, this means you are enjoying the benefits of international trade.

Viewing: What is International Trade

International trade helps the markets of other countries to expand, we can buy goods and services that our country does not have. That’s why you can choose between a Japanese, German or American car. As a result of international trade, the market sees stiffer competition hence the price has to be more competitive, which results in cheaper products for the consumers.

What is international trade

?International trade is the exchange of goods and services between countries. This form of trade drives the entire world economy, in which prices, supply and demand, act and are affected by global events. For example, political changes in Asia can lead to an increase in labor costs, thus increasing production costs for an American shoe company based in Malaysia, leading to an increase in the price of a pair of tennis shoes at your local mall. On the contrary, reducing labor costs will make your shoes cheaper.

Global trade creates opportunities for consumers and countries to be exposed to goods and services that their countries do not have. Almost all the types of products you need can be found on the international market: food, clothing, parts, oils, jewelry, wines, stocks, currencies, and water. Services are also traded such as tourism, banking, consulting and transportation. When a product is sold to the world market it is called an export, and when a product is bought from the world market it is called an import. Imports and exports are accounted for in the current account of a country’s balance of payments.

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Increasing the efficiency of international trade

International trade allows rich countries to use their resources more efficiently – whether labor, technology or capital. Countries all have strengths in different natural resources and assets (land, labor, capital and technology), which is why some countries are capable of producing certain goods of the same quality. products from other countries, but the cost is lower, so the selling price is also cheaper. If a country cannot efficiently produce a good, it can buy it from another country. This is called specialization in international trade.

Let’s take a simple example. Countries A and B both produce sweaters and wine. Country A produces 10 sweaters and 6 bottles of wine a year while Country B produces 6 sweaters and 10 bottles of wine a year. Both can produce a total of 16 units of goods. However, it takes country A 3 hours to produce 10 sweaters and 2 hours to produce 6 bottles of wine (a total of five hours). Country B, it takes 1 hour to produce 10 sweaters and 3 hours to produce 6 bottles of wine (four hours in total).

These two countries realized that they could produce more by focusing on products in which they had a comparative advantage. Country A starts to produce only wine and Country B produces only sweaters. Thus, each country can produce 20 units of a good per year, and the exchange rate for the two products is equal. Thus, each country can use up to 20 units of goods.

We can see that for both countries, the opportunity cost of producing both products is greater than the cost of specialized production. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after international exchange). Specialization reduces opportunity costs and thus maximizes the efficiency of producing and trading needed goods. With a larger supply, the price of each product will decrease, increasing the benefit of the end consumer.

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Note that, in the above example, country B can produce both wine and cotton more efficiently than Country A (in less time). This is called an absolute advantage, and Country B has this advantage possibly due to a higher level of technology. However, according to international trade theory, even if one country has an absolute advantage over another, it can still benefit from specialization.

Other benefits of international trade

International trade not only increases the efficiency of global production but also allows countries to participate in the global economy, encouraging opportunities for foreign direct investment (FDI), which is the amount of money that individuals invest in companies and other assets abroad. In theory, so new economies can grow more efficiently and easily become competitive economies.

As for the host country, they receive foreign currency as well as know-how and technology through FDI, thereby raising the level of labor and, in theory, leading to growth in gross domestic product. For investors, FDI helps them expand and develop the company, which means increased revenue.

Free trade and protectionism

As with other theories, there are opposing views. International trade is viewed from two opposing perspectives on the degree of control in trade: free trade and protectionism. The theory of free trade is the simpler of the two: the laissez-faire theory holds that there should be no restrictions on trade. The self-regulation of supply and demand on a global scale will ensure production efficiency. Therefore, it is not necessary to introduce any policies on protection or to stimulate trade and growth, market factors will automatically adjust.

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In contrast, protectionism argues that the rules of international trade are important to ensure that markets function properly. Proponents of this theory believe that inefficient markets can impede the benefits of international trade and that their aim is to guide markets to function properly. Protectionism is implemented in many different forms, but the most common are tariffs, subsidies, and quotas. These policies are applied to limit all inefficiencies in the international market.

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Opening up opportunities for specialization, helping to use resources more efficiently, international trade has the ability to maximize a country’s production capacity, thereby maximizing the amount of goods and services that country receives. However, Opponents of free trade argue that it can harm developing countries. It is certain that the global economy is constantly changing, and with its development, every country must become a part of it.