Domestic and International Trade

Meaning of Domestic Trade

Domestic or internal trade or home trade involve the exchange of goods and services among the residents of country. It includes all trading/selling and buying activities of all types within a particular country e.g. Nigeria.

Meaning of International Trade

International trade or external trade or foreign trade involves the exchange of goods and services between two or more countries. It is trade among nation. E.g. between Nigeria and other countries. People firms, government and agencies exchange goods and services across international boundaries.

 International trade can be:

1. Bilateral-trade involving exchange of goods and services among two countries. Each country balances its payments and receipt with each other.
2. Multilateral-trade in which a country exchanges goods and services with many other countries.

Similarities between International Trade and Internal Trade

1. Both trades involve the use of money as a medium of exchange.
2. Both have to do with some degree of specialization between the trading partners which is the basis of exchange.
3. Both trades involves the buying and selling of goods and services.
4. Both trades arise from inequitable distribution of natural endowments and production resources.
5. Both trades involve the activities of middle men.

Differences between International Trade and Internal (domestic) Trade

1. International trade takes place across national boundaries, internal trade takes place within the borders of a country.
2. Internal trade uses local or national currency whereasdifferent currencies are used in foreign trade.
3. There is no restriction for home trade whileforeign trade can be restricted by import/export duties, tariffs, embargoed
4. International trade is a foreign exchange earner whilehome trade only generates internal revenue.
5. Factors of production are freely mobile in home trade, butthere are restrictions for such in international trade. e.g. labour mobility is subject to immigration laws among countries.
6. Barriers of distance, transport costs are greater in foreign trade thanin home trade.
7. The problems of foreign exchange and balance of payments are peculiar to foreign trade while internal trade has no such problems.

Reasons/Basis for International Trade

International trade arose from the international specialization and division of labour. These have to be for the following reasons:

1. Uneven distribution or endowment in natural resources of nations such as minerals. For instance, Nigeria has coal and crude oil; Ghana is endowed with bauxite while Canada is enriched with nickel.
2. Differences in climate and soil which gives rise to the cultivation of different crops.
3. Differences in capital stock which determines the quantity and variety of goods and services each country will be able to produce.
4. Differences in labour skills: There are variations in the volume and quality of labour for productive activities.
5. Differences in technology:  Countries advanced in technology can produce more industrial goods than others. E.g. Japan is good in electronic goods; Germany is good in Mercedez Benz cars, Switzerland in watches and China in a variety of items.
6. International trade takes place because no country has attained self sufficiency. For instance Nigeria imports cars, radio, watches etc from Japan while Japan gets Nigeria’s petroleum. The desire to satisfy wants each country cannot produce calls for exchange across countries.
7. The need to create a wider market for a nation’s goods and services is another reason for international trade.
8. International trade is also based on the premises that the cost of production of a commodity differs from one country to another. So a country will choose to import a good if it is cheaper to do so than to produce it.
9. International trade is also engaged in because of the desire of nations to improve the standard of living of their citizens.

Barriers to International Trade

There are problems besetting trade among nations. These includes

1. Differences in currency
2. Natural barriers of distance, seas, deserts, etc
3. Differences in language
4. Trade restrictions by some nations
5. Long and sometimes difficult processing of documents for foreign trade
6. Hindrance from political ideologies of different countries
7. Differences in units of weights and measures

Advantages or Merits of International Trade

1. It is a source of revenue for nations.
2. It leads to increase in total world output of goods and services.
3. It provides a wider market for goods.
4. It enhances better standard of living in many nations.
5. It promotes interdependence among nations which is a prospect for world peace and international goodwill.
6. It provides employment opportunities for exporters and importers.
7. It leads to a more efficient allocation of world productive resources.
8. It promotes specialization, division of labour and efficiency in production.
9. It enhances world economic growth and social progress.
10. It leads to increased foreign investments in West African nations.
11. It puts in check private monopoly power as importation of goods makes room for competition.

Disadvantages or Demerits of International Trade

In spite of its numerous advantages, there are some shortcomings of international trade. These are:

1. It may lead to over-dependence on other countries
2. It negatively affects the growth of infant industries
3. It negatively impacts on the cultural and moral values of a country and leads to decadence in social norms (e.g. indecent and immoral fashions imports into Nigeria)
4. It can reduce the efforts of a nation towards attaining self-sufficiency.
5. It can generate unemployment as high importation may reduce the level of production of domestic industries.
6. Unrestricted foreign trade may lead to balance of payment deficit i.e when import is higher than import.
7. It makes less developed countries become dumping grounds for all kinds of goods including dangerous and harmful ones such as arms and ammunition and alcohols.

EVALUATION (POST THE QUESTION TITLE AND YOUR ANSWERS IN THE BOX BELOW FOR DISCUSSION AND EVALUATION)

1. What is international trade?
2. Give 5 reasons why developing countries engage in international trade?