What is now called international trade has existed for thousands of years: long before there were nations with specific boundaries. Foreign trade means the exchange of goods and services between nations, but speaking in strictly economic terms, international trade today is not between nations. It is between producers and consumers or between producers in different parts of the globe. Nations do not trade, only economic units such as agricultural, industrial, and service enterprises can participate in trade.
Goods can be defined as finished products, as intermediate goods used in producing other goods, or as agricultural products and foodstuffs. International trade enables a nation to specialize in those goods it can produce most cheaply and efficiently and it is one of the greatest advantages of trade. On the other hand, trade also enables a country to consume more than it can produce if it depends only on its own resources. Finally, trade expands the potential market for the goods of a particular economy. Trade has always been the major force behind the economic relations among nations.
In 1776 the Scottish economist Adam Smith, in The Wealth of Nations, proposed that specialization in production leads to increased output and in order to meet a constantly growing demand for goods it is necessary that a country's scarce resources be allocated efficiently. According to Smith's theory, it is essential that a country trading internationally should specialize in those goods in which it has an absolute advantage that is, the ones it can produce more cheaply and efficiently than its trading partners can. Exporting a portion of those goods, the country can in turn import those that its trading partners produce more cheaply. To prove his theory Adam Smith used the example of Portuguese wine in contrast to English woolens.
Half a century later, the English economist David Ricardo proposed the theory of international trade which is still accepted by most modern economists. In line with the principle of comparative advantage, it is important that a country should gain from trading certain goods even though its trading partners can produce those goods more cheaply.
Trade based on comparative advantage still exists: France and Italy known for their wines, and Switzerland maintains a reputation for fine watches.
Thus, international trade leads to more efficient and increased world production, allows countries to consume a larger and more diverse amount of goods, expands the number of potential markets in which a country can sell its goods. The increased international demand for goods results in greater production and more extensive use of raw materials and labour, which means the growth of domestic employment. Competition from international trade can also force domestic firms to become more efficient through modernization and innovation.
It is obvious that within each economy the importance of foreign trade varies. Some nations export only to expand their domestic market or to aid economically depressed sectors within the domestic economy. Other nations depend on trade for a large part of their national income and it is often important for them to develop import of manufactured goods in order to supply the ones for domestic consumption.
UNIT 7
