WEEK 9 ECONOMICS FOR SS3
International or foreign trade refers to the exchange of goods and services across the border of two or more countries by their residents or governments. Through foreign trade a nation can obtain goods that that they have no capacity to produce.
It can be also defined as the exchange of goods and services between people of different countries. Example, Nigeria can sell crude oil to America and purchase electronics from her.
It can be defined as exchange of goods and services between two or more countries.
FORMS OF FOREIGN TRADE
- Bilateral trade: this occurs when one country agrees to exchange goods and services with another country. It involves buying and selling between two or more countries.
- Multilateral trade: this involves buying and selling among more countries. It happens when nations buy and sells with whatever country she wishes. E.g. Nigeria has multilateral trade agreement with countries like America, China, Russia, Britain and Holland.
DIFFERENCES BETWEEN DOMESTIC AND FOREIGN TRADE
|Domestic trade||Foreign trade|
|1. This is a trade within the boundary of the country||1. Trade with other countries|
|2. Trading is not subject to restrictions||2. There are restriction|
|3. The same currency is used to transact business||3. Different currency is used to transact business|
|4. Distance involved in short||4. Long distance involved|
|5. Same weight and measures are used||5. Different weight and measures are used|
SIMILARITIES BETWEEN FOREIGN AND DOMESTIC TRADE
- Import trade: this is the process of buying or purchasing of goods and services from other nations. Imports are goods and services bought by a country from abroad. It can be categorized into visible and invisible imports.
- Visible imports: these are physical or tangible goods purchased from other countries. It includes both capital and consumer goods. e.g. automobile, equipment, machinery, rice and electronics.
- Invisible import: these are services provided by other countries. E.g. insurance payment for travels, transportation and shipping.
- Export trade: this is the process of selling the products of a country abroad. It includes goods and services sold to other countries. Export can be visible or invisible.
- Visible export: these are tangible goods sold to other nations. Exports from Nigeria to other countries are made up of agriculture products and mineral resources. E.g. crude oil, cotton, palm oil
- Invisible export: these are the services sold by a country to other countries of the world. Examples are banking, insurance and transportation.
- Entre-port: this is the re-exporting of goods that has been imported from other countries. Goods imported from other country are later re-exported to another country.
FUNCTION OF NIGERIAN EXPORT PROMOTION COUNCIL
- Export developing activities: Nigeria export promotion council introduces measures to increase the volume and quality of goods to be exported.
- Activities relating to export marketing: it helps to provide information about Nigeria exports in the international market and how to improve marketability.
- Export funding: it provides export financing facilities e.g. insurance scheme and credit guarantee schemes.
- Provision of trade information: information is provided through publication of trade journals and export directives.
- Publicity of activities that facilitate trade: helps to review existing products for export and also to set out procedures for exportation.
REASONS FOR INTERNATIONAL TRADE
- Difference in level of industrialization: the level of industrialization differs from one country to another. Some countries are highly industrialized while some are not. This brings disparity in the level of production.
- Inequality in distribution of natural resources: natural resources are not evenly spread over the surface of the earth. Different resources are found in different parts of the world. This may necessitate international transactions among nations. Nigeria has crude oil in abundance while Ghana is blessed with gold.
- Difference in climatic condition: one of the reasons for international trade is difference in climatic conditions. Some countries are very cold while others are temperate.
- Difference in skills and technical knowledge: a country may develop skills and technical know-how in the production of certain products other than other countries.
- Difference in level of technology: the level of technology of some countries is more advanced than others. Because of this reason, goods can be produced efficiently in large quantities and better quality than others. This will necessitate international trade.
BENEFITS OF INTERNATIONAL TRADE
- Increase in total world output: it leads to maximization of output. Specialization gives rise to greater output. Total world output will increase as a result of international trade.
- Sources of foreign exchange: this is where foreign exchange earnings can be obtained.
- Increase in revenue: it provides revenue for the countries concerned
- Increase in specialization: foreign trade affords a nation the opportunity of specializing in the production of goods in which she has comparative advantage.
- Efficient allocation of resources: when a country specializes in the production of a commodity in which she has comparative advantage, it will lead to efficient and effective allocation of resources.
DISADVANTAGES OF FOREIGN TRADE
- Excessive production: in foreign trade, each country specializes in what she has comparative advantage. This will increase world output while cost per unit will reduce.
- Collapse of infant industries: the infant industries may not be able to withstand competitions from foreign companies which are bigger and efficient.
- Importation of dangerous goods: through international trade, dangerous goods like hard and expired drugs may be imported into a country.
- Leads to unemployment: infant industries may not be able to withstand the competition from foreign companies. This may lead to collapse and mass retrenchment of workers.
- Encourages dumping of goods: some countries especially developed countries are capable of producing goods in large quantity. Surplus is sold to less developed countries at a price lower to local prices.
BARRIERS OF INTERNATIONAL TRADE
- Language problem: communication between businessmen from various countries with different linguistic background may be difficult.
- Problem of distance: it may take days or weeks before one move from one country to another because of the long distance involved.
- Numerous documents: the documents are used in international trade are too many. This makes the processing of foreign trade too long and sometimes cumbersome.
- Difference in currency: every country has its own currency which is different from the currency of other countries.
- Government policy: foreign trade can be hindered by the political ideologies of different countries. A country may decide to trade with another country because of its political differences. E.g. USA and Libya in 1988.
RESTRICTION OF INTERNATIONAL TRADE
- Embargo: a complete ban on the importation of a certain goods.
- Import quota: this will specify the quantity of goods that will come from different countries.
- Import license: this is the authority given by the government of a country to an importer to import specified goods.
- Import duties: foreign trade can be restricted by imposition of duties on goods from other countries. This will increase the price and discourage importation.
- Tariffs: these are taxes levied on imported commodities.
REASON FOR RESTRICTION OF INTERNATIONAL TRADE
- Prevention of dumping of cheap goods
- Encouragement and protection of infant industries
- Prevention of importation of harmful product
- To maintain high level of employment
- Generation of revenue
- National defense
BALANCE OF TRADE
This is the difference between the values of a country’s visible export and visible import over a given period of time. It is favorable when a country’s export is more than import. It is unfavorable when import is more than export.
PROCEDURE FOR INTERNATIONAL TRADE
(a). Establishment of contact between importers and exporters: contact should be made between importers and exporters. They should be linked together to facilitate foreign trade.
Ways of establishment contact
1. Through intensive advertising in foreign country
2. Visiting places where trade fair are organized
3. Producers may send their sales representative to get order from foreign companies
(b). letter of enquiry: this is sent to the producer to enquiry whether goods needed are available
(c). quotation/Price list: this is sent to the importer in response to the letter the goods needed are available
(d). placing order: when the importer is satisfied, he will place an order stating the quantity of goods needed.
(e). clearing of goods: when goods arrive, the shipping company will ensure that they are assessed and duties paid.
ABSOLUTE ADVANTAGE THEORY
In 1776, Adam Smith propounded the theory of absolute advantage. He said a country should specialize in the production of those goods which she can produce better and leave other countries to produce better and leave other countries to produce the goods in which it has absolute advantages over its trading partners and import those goods in which it has absolute disadvantages. For example, if a country like Malawi can produce coffee easily because it is endowed and Niger can produce palm oil better than coffee therefore, Malawi should specialize in the production of coffee while Niger should produce palm oil.
The comparative advantage theory was propounded by David Ricardo in the 19th century. He said that international specialization is good for a nation. The law states that a country derives benefits from trade when they specialize in the production of goods in which they have the greatest comparative advantage over others and import those goods in which they have comparative disadvantages. A country has comparative advantage in the production of a good when their lowest opportunity costs of production were compared with other countries. This theory is based on only international specialization in production.
Assumptions of comparative cost theory
1. Two countries: it is assumed that only countries are involved in the international trade
2. Two commodities: two commodities are produced and traded
3. Labor is the only factors of production: labor is the only input used in production processes
4. Perfect mobility of factors: it can move from place to place
5. No cost of transportation: there is no cost of transportation of people and goods
Production level before specialization
Country Cocoa Coffee
Ghana 40 10
Togo 10 50
Solution to follow during lecture
Criticism of comparative cost
1. Theory ignore transport cost
2. Impossibility of complete specialization
3. Unrealistic assumption of labour cost
4. Theory is one sided
Briefly, write out the Hecksher Ohlin theory, the assumption and criticism