international trade introduction - lecture 1

1. INTERNATIONAL ECONOMICS - 1
(INTRODUCTION)
Dr. Arifa Saeed

2. MEANING OF BUSINESS
 A business is defined as an organization or enterprising entity
engaged in commercial, industrial, or professional activities.
 Businesses can be for- profit entities or non-profit organizations.
 Business types range from limited liability companies, sole
proprietorships, corporations, and partnerships.
 There are businesses that run as small operations in a single
industry while others are large operations that spread across many
industries around the world.

3. WHAT IS TRADE?
 Trade is a basic economic concept involving the buying and selling
of goods and services, with compensation paid by a buyer to a
seller, or the exchange of goods or services between parties. Trade
can take place within an economy between producers and
consumers.

4. WHAT IS INTERNATIONAL TRADE?
 International Trade refers to the exchange of products and
services from one country to another. In other words, imports and
exports. International trade consists of goods and services moving
in two directions:
1. Imports – flowing into a country from abroad.
2. Exports – flowing out of a country and sold overseas.

5.  Visible trade refers to the buying and selling of goods – solid, tangible
things – between countries.
 Invisible trade, on the other hand, refers to services.
 Most economists globally agree that international trade helps boost
nations’ wealth.
 When a person or company purchases a cheaper product or service from
another country, living standards in both nations rise.
 There are several reasons why we buy things from foreign suppliers.
Perhaps, the imported options are cheaper. Their quality may also be
better, as well as their availability.

6.  The exporter also benefits from sales that would not be possible if
it solely sold to its own market. The exporter may also earn
foreign currency. It can subsequently use that foreign currency to
import things.
 The term ‘commerce’ is often (not always) used when referring
to the buying and selling of goods and services internationally.

7. HISTORICAL BACKGROUND
Adam Smith (1723-1790), a Scottish moral
philosopher and pioneer of political economy,
believed in international trade. Many
economists today call Smith the ‘father of
modern economics.’

8. WHY DOES INTERNATIONAL TRADE EXIST?
 Nations trade internationally when there are not sufficient resources
or capacity to satisfy domestic needs and wants domestically.
 By developing and exploiting (utilizing) their domestic
resources, countries can produce a surplus. They may use this
surplus to buy goods they need from abroad, i.e., through
international trade.

9. INTERNATIONAL ECONOMICS?
 International economics deals with the economic activities of various countries and
their consequences.
 In other words, international economics is a field concerned with economic interactions
of countries and effect of international issues on the world economic activity.
 It studies economic and political issues related to international trade and finance.
 International trade involves the exchange of goods or services and other factors of
production, such as labor and capital, across international borders.
 On the other hand, international finance studies the flow of financial assets or
investment across borders. International trade and finance became possible across
nations only due to the emergence of globalization.

10. CONCEPT
 International economics refers to a study of international forces that
influence the domestic conditions of an economy and shape the
economic relationship between countries. In other words, it studies the
economic interdependence between countries and its effects on economy.
 The scope of international economics is wide as it includes various concepts, such
as globalization, gains from trade, pattern of trade, balance of payments, and FDI.
Apart from this, international economics describes production, trade, and
investment between countries.

12.  By internal or domestic trade are meant transactions
taking place within the geographical boundaries of a
nation or region.
 Trade within the territory (political boundary) of a
nation “internal” trade.
 It is also known as intra-regional or home
trade.

13.  International trade, thus, refers to the exchange of goods and
services between one country or region and another. It is also
sometimes known as “inter-regional” or “foreign” trade.
 Briefly, trade between one nation and another is called
“international” trade,
 For all practical purposes, trade or exchange of goods between
two or more countries is called “international” or “foreign”
trade.
Thus, International trade, is trade among different countries or
trade across political frontiers.

14. WHY INTERNATIONAL TRADE?
1. Human wants and countries’ resources do not totally coincide.
Hence, there tends to be interdependence on a large scale.
2. Factor endowments in different countries differ.
3. Technological advancement of different countries differs.
Thus, some countries are better placed in one kind
of production and some others superior in some other
kind of production.

15. 4. labor and entrepreneurial skills differ in different countries.
5. Factors of production are highly immobile between countries.
In short, international trade is the outcome of territorial division
of labor and specialisation in the countries of the world.

16. DISTINGUISHING FEATURES OF
INTERNATIONAL TRADE:
 (1) Immobility of Factors:
 The degree of immobility of factors like labor and capital is generally greater between countries
than within a country. Immigration laws, citizenship, qualifications, etc. often restrict the
international mobility of labor.
 International capital flows are prohibited or severely limited by different governments.
Consequently, the economic significance of such mobility of factors tends to equality within but
not between countries. For instance, wages may be equal in Mumbai and Pune but not in Bombay
and London.
 In this context, it may be pointed out that the price of a commodity in the country where it is
produced tends to equal its cost of production.

17.  The reason is that if in an industry the price is higher than its cost, resources
will flow into it from other industries, output will increase and the price will fall
until it is equal to the cost of production. Conversely, resources will flow out of
the industry, output will decline, the price will go up and ultimately equal the
cost of production.
 But, as among different countries, resources are comparatively immobile;
hence, there is no automatic influence equalising price and costs. Therefore,
there may be permanent difference between the cost of production of a
commodity.
 For instance, the price of tea in India must, in the long run, be equal to its cost
of production in India. But in the U.K., the price of Indian tea may be
permanently higher than its cost of production in India. In this way,
international trade differs from home trade.

18.  (2) Heterogeneous Markets:
 In the international economy, world markets lack homogeneity on account of
differences in climate, language, preferences, habit, customs, weights and
measures, etc. The behaviour of international buyers in each case would,
therefore, be different.
 (3) Different National Groups:
 International trade takes place between differently cohered groups. The socio-
economic environment differs greatly among different nations.
 (4) Different Political Units:
 International trade is a phenomenon which occurs amongst different political
units.

19.  (5) Different National Policies and Government Intervention:
 Economic and political policies differ from one country to another.
Policies pertaining to trade, commerce, export and import, taxation, etc.,
also differ widely among countries though they are more or less uniform
within the country. Tariff policy, import quota system, subsidies and
other controls adopted by governments interfere with the course of
normal trade between one country and another.
 (6) Different Currencies:
 Another notable feature of international trade is that it involves the use of
different types of currencies. So, each country has its own policy in regard
to exchange rates and foreign exchange.

20. QUICK LOOK AT FEATURES…

21. DOMESTIC V/S INTERNATIONAL TRADE
BASIS FOR COMPARISON DOMESTIC BUSINESS INTERNATIONAL BUSINESS
Meaning A business is said to be domestic, when
its economic transactions are
conducted within the geographical
boundaries of the country.
International business is one which is
engaged in economic transaction with
several countries in the world.
Area of operation Within the country Whole world
Quality standards Quite low Very high
Deals in Single currency Multiple currencies
Capital investment Less Huge
Restrictions Few Many
Nature of customers Homogeneous Heterogeneous
Business research It can be conducted easily. It is difficult to conduct research.
Mobility of factors of production Free Restricted

22. CONCLUSION
 Carrying out the activities of international business and its
management is far more difficult than conducting a domestic
business. Due to changes in political, economic, socio-cultural
environment across the nations, most business entities find it difficult
to expand their business globally. To become a successful player in the
international market firms need to plan their business strategies as
per the requirement of the foreign market.