isb module 4

8/2/2019 ISB Module 4

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AIBS

Semester 2

Indian System Of Business

Luvnica Rastogi


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What is Foreign Trade

Foreign trade is nothing but trade between the different

countries of the world. It is also called as International

trade, External trade or Inter-Regional trade.

It consists of imports, exports and entrepot. The inflow ofgoods in a country is called import trade whereas outflow

of goods from a country is called export trade.

Many times goods are imported for the purpose of re-

export after some processing operations. This is called

entrepot trade.

Foreign trade basically takes place for mutual

satisfaction of wants and utilities of resources.

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3 Types of Foreign Trade

Import Trade : Import trade refers to purchase of goods

by one country from another country or inflow of goods

and services from foreign country to home country.

Export Trade : Export trade refers to the sale of goodsby one country to another country or outflow of goods

from home country to foreign country.

Entrepot Trade : Entrepot trade is also known as Re-

export. It refers to purchase of goods from one country

and then selling them to another country after some

processing operations.

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Need and Importance of

Foreign Trade

1. Division of labour and specialisation

Foreign trade leads to division of labour andspecialisation at the world level. Some countries have

abundant natural resources. They should export raw

materials and import finished goods from countries which

are advanced in skilled manpower. This gives benefits to

all the countries and thereby leading to division of labour

and specialisation.

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Contd

2. Optimum allocation and utilisation of resources

Due to specialisation, unproductive lines can be eliminated and

wastage of resources avoided. In other words, resources are

channelised for the production of only those goods which would givehighest returns. Thus there is rational allocation and utilization of

resources at the international level due to foreign trade.

3. Equality of prices

Prices can be stabilised by foreign trade. It helps to keep the

demand and supply position stable, which in turn stabilises the

prices, making allowances for transport and other marketing

expenses

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Contd..

4. Availability of multiple choices

Foreign trade helps in providing a better choice to the

consumers. It helps in making available new varieties to

consumers all over the world.

5. Ensures quality and standard goods

Foreign trade is highly competitive. To maintain and

increase the demand for goods, the exporting countries

have to keep up the quality of goods. Thus quality and

standardised goods are produced6


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Contd

6. Raises standard of living of the people

Imports can facilitate standard of living of the people. This is

because people can have a choice of new and better varieties of

goods and services. By consuming new and better varieties of

goods, people can improve their standard of living.

7. Generate employment opportunities

Foreign trade helps in generating employment opportunities, byincreasing the mobility of labour and resources. It generates

direct employment in import sector and indirect employment in

other sector of the economy. Such as Industry, Service Sector

(insurance, banking, transport, communication), etc

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8. Facilitate economic development

Imports facilitate economic development of a nation. This is

because with the import of capital goods and technology, a

country can generate growth in all sectors of the economy, i.e.

agriculture, industry and service sector.

9. Assitance during natural calamities

During natural calamities such as earthquakes, floods, famines,

etc., the affected countries face the problem of shortage of

essential goods. Foreign trade enables a country to import food

grains and medicines from other countries to help the affected

people.8


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Contd

10. Maintains balance of payment positionEvery country has to maintain its balance of payment position. Since,

every country has to import, which results in outflow of foreign

exchange, it also deals in export for the inflow of foreign exchange.

11. Brings reputation and helps earn goodwillA country which is involved in exports earns goodwill in the international

market. For e.g. Japan has earned a lot of goodwill in foreign markets

due to its exports of quality electronic goods.

12. Promotes World Peace

Foreign trade brings countries closer. It facilitates transfer of technologyand other assistance from developed countries to developing countries.

It brings different countries closer due to economic relations arising out

of trade agreements. Thus, foreign trade creates a friendly atmosphere

for avoiding wars and conflicts. It promotes world peace as such

countries try to maintain friendly relations among themselves.9


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The Advantages Of Foreign Trade.

There is an increasing demand for foreign trade

because of the following reasons:

The natural resources are unevenly distributed.

The presence of specialization and division of labour. Different countries have difference in economic growth

rate.

The presence of the theory of comparative cost.

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AdvantagesThe following are some of the advantages of foreign trade:

1. Optimum use of Resources: Foreign trade helps in the optimum

use of natural resources and avoid wastages of resources.

2. Stable Price: It ensures the presence of stable price by avoiding

wide fluctuations in prices. It tries to equalise the world price.

3. Availability of all types of goods: It enables a country to import

those goods which it cannot produce.

4. Increased Standard of living: It ensures more production to meet

the demand of the people of different countries. By increased

production, it becomes possible to increase income and the

standard of living of its people. It also increase the standard of

living by increasing more employment opportunities.5. Large Scale production: It ensures large production because the

production is carried on to meet the demand of its people as well as

world market. Large scale production also ensures a great deal of

internal economies which reduces the cost of production.

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ProblemsForeign trade is not free from difficulties. The following are some

of the important difficulties of foreign trade:

1. It is a long distance trade and as such it becomes difficult to

maintain close relationship between the buyer and the seller.

2. Each country has its own language. As foreign trade involves trade

between two or more countries, there is diversity of languages. This

difference in language creates problem in foreign trade.

3. Foreign trade involves preparation of a number of documents which

also creates difficulties in the way of foreign trade.

4. Some restrictions are imposed on export and import of

commodities. These restrictions stands on the progress of foreign

trade.

5. Foreign trade involves a great deal of risks because trade takes

place over a long distance. Though the risks are covered through

insurance, it involves extra cost of production because insurance

cost is added to cost.

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Scope of Foreign Trade

The aim of foreign trade is to increase production and to

raise the standard of living of the people. Foreign trade

helps citizens of one nation to consume and enjoy the

possession of goods produced in some other nation.

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I. Uneven Distribution of

Natural Resources: Natural resources of the world are not evenly divided amongst the

nations of the world. Different countries of the world have different

amount of natural resources and they differ with each other in regard

to climate, minerals and other factors.

Some countries can produce more of sugar like Cuba, some canproduce more of cotton like Egypt, while there are some others

which can produce more of wheat like Argentina.

But all these countries need sugar, cotton and wheat. So they have

to depend upon one another for the exchange of their surpluses with

the goods are in short in their country and hence the need for foreign trade is natural.

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II. Division of Labour and

Specialization:1. Due to uneven distribution of natural resources, somecountries are more suitable placed to produce some

goods more economically than other countries.

2. But they are geographically at a disadvantageousposition to produce other goods.

3. They specialize in the production of such goods in

which they have some natural advantage in the form of

availability of raw material, labour, technical know-how,

climatic conditions, etc., and get other goods in

exchange for these goods from other countries.

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III. Differences in Economic

Growth Rate: There are many differences in the economic growth

rates of different countries. Some countries are

developed, some are developing, while there are some

other countries which are under-developed; these under-

developed and developing countries have to depend

upon developed ones for financial help, which ultimately

encourages foreign trade.

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IV. Theory ofComparative Cost:

According to the theory of comparative cost each country

should concentrate on the production of those goods for

which it is best suited, taking into account its natural

resources, climate, labour supply, technical know-how

and the level of development. Each country specializes in the production of those

goods which it can produce at the lowest cost as

compared to other countries which leads to international

specialization and division of labour.

This reduces the cost of production all over the world

and improves the standard of living of the people in

various countries. Hence the theory of comparative cost

encourages foreign trade.17


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Thank You

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isb module 4

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