International Trade

International trade refers to exchange of goods and services among countries. International trade is used in the determination of gross domestic product of a given country. It has also facilitated increase in globalization, industrialization, outsourcing, multinational corporations and highly developed transportation. International trade has made the world to be a small village due to globalization. Countries are able to access those products that are not produced locally through international trade. International trade is similar to domestic trade in terms of producing goods and services though the difference comes in on the cost incurred to carry out business. International trade has more costs since tariffs and time cost is involved. Also mobility of factors of production brings another difference between domestic and international trade since they are more mobile in the domestic industry. Countries opt to import goods and services produced by the factors of production instead of importing the factor of production. (Hill, 2005)

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International trade is beneficial to both the importing and the exporting countries. Some countries find importation of products cheaper and therefore more preferable. International trade has led to the efficient allocation of the scarce resources which is done in the global market. International trade has also facilitated free trade among countries. In the current economy goods and services are liberally exchanged among countries as a result of free trade. Also quality products are produced at lower price in the free market. The free trade also enables purchase of goods and services at lower prices and sells them at higher prices in other countries. This is beneficial to the buyers since the goods and services are made available and also to the sellers through profits made. Free trade also enables the developing countries speed up the growth of their economy. This is through importation of foreign technology and machines used to make production efficient. The developing countries can also send their scholars to develop countries where they can acquire advanced skills and ideas which they in turn bring back to their country. This will increase innovation and skilled labor in developing countries hence improvement in their economy. Every country must be depended on the other country regardless of their economic status since even the most developed countries get raw materials from the les developed countries. International trade also improves the gross domestic product of countries. International trade also gives investors opportunity to invest in competitive markets globally. The country in which the investments are done therefore have increased cash inflow hence better economy. The common international investments involve real estates, bonds and stocks. (Hill, 2005)

International trade has led to the decrease of discrimination and inequalities in trading among countries. Each country has its importance in the global market and therefore no country can be excluded from the global trading. If one country has a certain product in the global market it will be demanded by another country which does not have the product. In this case a country is able to acquire the goods and services which are not produced in its country and the exporting country is able to sell the excess of its production. Both countries will experience economic growth which is an advantage as a result of international trade. The international trade has also new development in the observation of the monetary policies. Most countries are working to see that they observe the monetary policies and have their inflation at zero levels. This has caused decrease in restrictions in the global trading. (Mankiw, 2008)

A nation is also said to improve its economy when it participates in the international trading by reducing its tariffs. This is because other countries will be willing to trade with it since the barriers to trade will have been reduced. Consumers in the country will have the supply of a variety of goods and services at a cheaper price since the suppliers will not be incurring more costs due to reduced tariffs. Those countries which charge high tariffs discourage other countries from trading with it. These expose their consumers to the shortage goods and services and high prices of these products. It has also been observed that countries are able to sustain long term growth through international trade. This is because international trade is always growing and it grows together with the global economy. (Madura, 2008)

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International trade is the main controller and determinant of the commercial globe. This is because producers in different countries are able to make produce at a profit due to the extended market. Their profits would be reduced if they were limited to their domestic market only.  The developed countries are seen to have a reduced cost of production to the high levels of improved technology, skilled labor, advanced machinery and innovations involved in production. International trade has led to the exposure of the developing countries to these factors which is enabling them to improve the efficiency in production. There is also a reason why international trade is always beneficial. One of the reasons is the low production costs in certain countries compared to others, availability of specialized industries and differences in consumer tastes and preferences. For these reasons the following models have been formulated to explain how the benefits of international trade can be increased. (Levi, 2009)

Ricardian model explain the relative advantage derived from international trade. In his model countries are able to specialize in the production of goods and services that they can produce best. Countries will not produce a wide range of products but instead major and specialize in the few that they can well produce. When the country has a specialized production then it will be able to produce more goods and services at a lower cost. This will make it have enough to consume and more to import hence more income. The low cost of production will enable the country to sell it products and services at lower prices hence more sales and income. This model does not involve the availability of factors of production in a country and also assumes technological differences among countries. Ricardian model also has assumptions such like a steady marginal product of labor since labor is seen as the main input during production. It also assumes perfect competition, limited labor in the economy and immobility of labor in the internationally. The model describes advantage in the short run where countries have technological differences. These make countries to specialize on the production of goods and services that favors them. (Gene M. Grossman, 1995)

The other model that brings out the advantages of international trade is the Heckscher-Ohlin model. This model emphasis that countries should produce goods and services that require recourses which are available in plenty. The country should in turn import those goods and services that require the scarce resources for production. This model differs from the one of relative advantage on the basis that it does not stress on the specialization in production or efficiency in production. It instead emphasizes on the production of goods and services with those resources hat are plenty and cheap. The country will therefore be able to produce more due to the availability of factors of production. The cost of production will also be low because of the low prices of the factors of production. The country will have excess output and have goods and services to export. The model has the following assumptions that there is mobility of capital and labor among sectors. There is difference in the quantity of labor and capital among countries. It also assumes the same technology in all countries, same tastes and preferences and a free trade. The model does not include capital goods trading. (Gene M. Grossman, 1995)

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There is also the new trade theory basis its explanation on the factors that industries should must consider when doing business. The factors that are mostly thought of are increase in the return to scale and monopolistic completion. One of this model’s out come is the home market effect which explains that if an industry tends to concentrate in a certain location due to the return in economies of scale and it is having high transportation cost the industry will be located in the region with the highest demand to reduce cost. These will enable the industry to have enough profits as a result of reduced transportation costs. There is also the gravity theory which explains that more trade will be between countries that are more related economically. Countries which have close distant and more interaction will tend to trade more. (Gene M. Grossman, 1995)

There is also the trade intermediate theory which explains the inputs as the major products in the international trade. This is because inputs and especially raw materials cover the largest share in production. Most productions must at least an item which is imported for it to be complete. In the Ricardo-Sraffa trade model there is inclusion of the intermediate goods such as machine parts and tools, processed products and fuel. These intermediate products are imported and used as inputs in the production process of the given country. In this theory capital is mobile and can move freely in all countries. Labor on the other hand is not mobile in the original country.

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