1. Definition and Types (Bilateral and Multilateral)
2. Reasons for International Trade
3. Barriers of International Trade
4. Difference between Domestic and International trade.
One way by which we live better on earth today is because international trade permits national, regional or territorial division of labour to be practiced. International trade also known as foreign trade or external trade involves the exchange of goods and services between two or more countries.
TYPES OF INTERNATIONAL TRADE
There are two major types of international trade. These are:
- Bilateral International Trade – Bilateral international trade is a trade agreement in which two countries exchange goods and services.
- Multilateral International Trade – Multilateral international trade is a type of trade in which a country trades with many other countries. E.g. Nigeria trades with the USA, Britain and Japan.
REASONS FOR INTERNATIONAL TRADE
1. Uneven distribution of natural resources. While some countries are naturally blessed, others have little or no natural resources.
2. Differences in Climatic Condition – This variation gives rise to growth of different crops, hence the need for exchange.
3. Differences in Technology – Some countries with advanced technology can produce some industrial product at reduced cost and sell to the less developed countries.
4. Expansion of market for product.
5. Desire to improve the standard of living
1. What is Foreign Trade?
2. Give five reasons for international trade.
BARRIERS OR PROBLEMS OF INTERNATIONAL TRADE
1. Language problem
2. Problem of distance
3. Numerous documents
4. Differences or fluctuation in currency
5. Tariff – This makes imported goods more expensive.
6. Religion and cultural differences.
7. Artificial barriers e.g. ban, quota, or the use of license
8. Transport and Communication problem.
9. Government policy.
DIFFERENCE BETWEEN DOMESTIC AND FOREIGN TRADE
A. Common language is spoken in Domestic trade while in Foreign trade requires knowledge of new language.
B. There are differences in system of weighing and measuring in one country vis-à-vis another. A country has only one system of such weigh and measuring.
C. Differences in transport cost due to distance between buyers and sellers, documentation requirement, need for insurance in respect of foreign trade distinguish foreign trade from home trade.
D. There are also differences in legal systems and culture under international trade but the legal system are the same in domestic trade.
E. In foreign trade, buyers and sellers use different currencies whereas buyers and sellers in home trade use the same type of currency.
F. There is possibility of restriction – tarrifs, import duties, export duties quota embargoes – when goods are exchange across national boundaries while this does not occur in home trade.
1. In what ways is foreign trade different from domestic trade (WASSCE) June 2003.
2. Explain five ways Nigeria will benefit from trading with Britain.
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1. International trade and domestic trade are similar in all aspect except that………….
A. Transportation by land, water and air is involved B. Goods are exchanged
C. Services are exchanged D. The same currency is used as medium of exchange
E. Specialization and increased consumption is encouraged.
2. International trade is necessary mainly because………………
A. no country can live in economic isolation B. different countries are endowed with the same natural and man-made resources C. some countries have comparative cost advantage in the production of certain commodities D. the world demand for and supply of various categories of commodities is expanding very fast. E. Countries want to build up their foreign exchange reserves.
3. International trade takes place because of differences in …… A. production cost B. language C. currency D. government policy D. international boundary
4. The instrument used in many countries to restrict imports include: A. high tariff
B. price index C. exercise duties D.bank rates E. subsidies
5. The exchange of goods and services across different countries can be described as ………… A. Bi-lateral trade B. multilateral trade C. national trade D. home trade
1. State five benefits of international trade.
2. Outline five obstacles to effective trade among countries in the world.
INTERNATIONAL TRADE II
1. Advantages and disadvantages of international trade.
2. The law of comparative (cost) advantage.
3. Instruments of trade protection.
4. Reasons for trade protection.
International trade has enormous advantages among which are:
1. International trade generates the exchange of goods and services among the nations of the world to mutual advantages of all participating countries.
2. Promotion of economic development.
3. International trade provides employment opportunities.
4. It enhances international specialization.
5. It leads to increase in world output.
6. International trade promotes friendship among nations of the world.
7. International trade increases the standard of living.
8. It fosters – equitable distribution of national resources.
9. Countries are able to acquire skills and ideas.
DISADVANTAGES OF INTERNATIONAL TRADE
1. International trade can lead to dumping of goods into less developed countries by multinational companies from the developed nations.
2. This development above affects infant industries adversely.
3. International trade if not checked can destroy the cultural values of a country. E.g use of mini skirt from America is anti-cultural and against our social norms.
4. Through international trade, harmful or dangerous goods can be imported into a country by unscrupulous business men.
5. Deficit may arise, which affects the country adversely.
6. Where dumping is highly prevalent, it may lead to unemployment.
7. Reduction of effort to attain self-reliance.
8. The developed countries may use their position to exploit the less developed ones.
1. State five advantages of International Trade.
2. Give four arguments against International Trade
LAW OF COMPARATIVE COST ADVANTAGE
The theory or principle of comparative cost advantage states that countries derive mutual benefit from trade when they specialize in the production of those commodities in which they have greatest comparative cost advantage over others and exchange them for other commodities which have comparative cost disadvantage.
A country has a comparative advantage over others in the production of a commodity in which it has the lowest opportunity cost than others. Therefore, it is the real cost of producing a commodity (in terms of other commodities forgone) that is taken into consideration. This theory was propounded by David Ricardo in the 19th century.
ASSUMPTIONS OF THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE
This principle or theory is based on the following assumptions:
1. There are only two countries.
2. Only two items are produced with the available resources.
3. There is free flow and mobility of factors of production.
4. There is no transport cost
5. Constant costs prevail.
6. Technology is constant.
7. Labour is the only factor of production. In line with the above assumptions, Nigeria and the United States of America (USA) for example, are producing and consuming rice and wheat.
By the Law of Comparative Cost Advantage. Nigeria should specialize in the production of rice while USA should specialize in the production of wheat.
THE PRINCIPLE OF ABSOLUTE ADVANTAGE
The principle of absolute advantage was propounded by Adam Smith and it states that a country should specialize in the production of a commodity or commodities and services in which it has absolute advantage over other countries. According to Adam Smith, a country has an absolute advantage over other countries if she can produce a commodity or service which other countries cannot produce. Again, given the same unit of resources, a country has absolute advantages where she can produce the two commodities concerned at the least cost.
1. Using the United States of America and Nigeria as an example, show how the two countries will gain by specializing and trading on the basis of the theory of comparative cost advantage (NECO June, 2003).
2. Outline five assumptions of the theory of comparative advantage.
INSTRUMENTS OF TRADE PROTECTION
The government of any country control or restrict trade through the following instrument.
1. Import duties or tariffs: This is a tax imposed on imported goods to reduce the amount of trade.
2. Foreign Exchange Control: This is the control that is exercised by the state, and usually through the Central Bank on all dealings, in gold and foreign exchange i.e. foreign currencies.
3. Import licensing – Under import licensing, no commodity may be imported except on the basis of individual licences issued by the government of a country.
4. Devaluation – This is a deliberate reduction in the value of a country’s currency in terms of the values of the currencies of other countries of the trading world. Devaluation is used as a tool of correcting an imbalance in a country’s balance of payments.
5. Quota – An import quota is a quantitative restriction imposed on commodities entering a country for a specified period of time.
6. Embargo – This is the prohibition or outright ban placed on some imported goods.
REASONS FOR TRADE PROTECTION
The following points are advanced in support of trade protection.
i. Maintenance of full employment at home.
ii. Protection of infant industries.
iii. Development of import substitutes at home
iv. To correct or remove any imbalance in Balance of payment Account.
v. To raise revenue e.g. tax
vi. Prevention of dumping.
vii. Prevention of harmful and non-essential goods.
viii. Government may protect trade for strategic reasons – e.g. in retaliation against a foreign state.
1. What are the arguments for protection in international trade?
2. Mention any five instruments of Trade protection.
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1. Which of these does not relate to the law of comparative advantage?
A. the law of comparative advantage was propounded by David Ricardo B. the law stresses the importance of relative efficiency. C. in order to specialize a country must have absolute advantage D. the principle if followed, should increase total world output.
2. Devaluation means A. reduction in the value of the national currency B. a reduction in the purchasing power of foreign currencies C. a reduction in the value of domestic currency relative to foreign currencies D. a decrease in the purchasing power of foreign currencies.
3. Dumping in economics means the selling of goods in a foreign market ………….
A. at a price below that received in the home market B. at a price that receive in the home market C. at a price equal to the cost price in the home market D. in order to encourage indigenous producers E. at a price equal to selling price in the home market.
4. Foreign Exchange control in Nigeria is enforced by the ………….
A. Commercial banks B. Merchant banks C. Mortgage bank D. Central bank
E. Agricultural Development Bank
5. Exchange Control is a weapon used in regulating …………. A. Internal trade B. stock exchange C. Foreign trade D.barter trade E. exchange of per sound property
- Why do countries impose restrictions on international trade?
- Justify government restriction of trade with foreign countries.