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Meaning and reasons for International Trade

Meaning of International Trade

International trade is referred to as the exchange or trade of goods and services between different nations. This kind of trade contributes and increases the world economy. The most commonly traded commodities are television sets, clothes, machinery, capital goods, food, and raw material, etc.,

International trade has increased exceptionally that includes services such as foreign transportation, travel and tourism, banking, warehousing, communication, advertising, and distribution and advertising. Other equally important developments are the increase in foreign investments and production of foreign goods and services in an international country. This foreign investments and production will help companies to come closer to their international customers and therefore serve them with goods and services at a very low rate.

All the activities mentioned are a part of international business. It can be concluded by saying that international trade and production are two aspects of international business, growing day by day across the globe.

Also Read: What is the Difference between Trade and Commerce?

Reasons for International Trade

(1) Production

  • It is not possible for a single country to produce equally at a cheap cost.
  • That is why international trade is taken into account.

(2) Factors of Production

  • Factors of production like labour, capital raw material,
  • For producing goods & services which are available at different rates in different countries.

(3) Cost of Production

  • Each country finds it advantageous to produce only those goods & services
  • That it can produce efficiently.
  • Rest of the activities is rest to other countries at a lower cost.

(4) Resources Distribution

  • Many of the times companies face problems in the availability of natural resources.
  • There is an unequal distribution of the resources in the country.

(5) Examples

  • Different countries are specialized in different sectors like
  • In India, Maharashtra is involved in textiles, West Bengal in jute products, Haryana and Punjab in food products, Kerala in spices, etc.
  • Same is categorized for other countries.

Importance of International Trade

International trade between various nations is an essential factor that is responsible for the increase in the standard of living, creating employment and empowering consumers to enjoy different kinds of goods. Few other important factors that are influenced by the International Trade are:

  • Utilization of raw materials- Some countries are naturally blessed with an abundance of raw materials, for example, Qatar for oil, Iceland for metals and fish (Iceland), etc. Without international trade, these countries would never benefit from their natural resources or raw materials.
  • Greater choice for consumers- More international trade results in more choices of products.
  • Specialization and economies of scale – greater efficiency- This means that it doesn’t matter what a country is specialized in, the essential thing is to pursue a specialization that allows companies to make a profit that outweighs most of the other factors.
  • Global growth and economic development- International trade influentials economic growth of a country. This increase also leads to the reduction of poverty levels.

Scope of International Business:

(1) Exports and Imports

  • It includes merchandise (tangible or having physical existence) of Goods.
  • Export merchandise means sending goods to other nations.
  • Import merchandise means receiving goods from other nations.
  • It does include the trade of services.

(2) Service Trade

  • It is also known as invisible trade.
  • It includes the trade of services (intangible or no physical existence).
  • There is both export and import of services.
  • Services like tourism, hotel, transportation, training, research etc.,

(3) Licensing & Franchising

  • Under this permission is given to the organization of other countries
  • To sell the product of a particular company.
  • Under its trademark, patents in return of some fees. Example– Pepsi and Coca Cola are produced and sold through different sellers abroad.
  • Franchising is similar to licensing but associated with services. Example-Dominos, burger king, etc.,

(4) Foreign Investment

  • It includes the investment of available funds in foreign companies to get returns.
  • It can be of 2 types:(1) Direct investment means investing funds in plant and machinery for marketing and production, also known as a foreign direct investment (FDI). Sometimes these investments are done jointly known as joint ventures. (2) Portfolio investment means one company invests in another company by way of investing in its securities and earn income in the form of interest and dividends.

Advantages of International Business:

(1) Income

  • It helps in earning foreign exchange to the organizations.
  • Forex helps in paying off the cost of imports of capital goods, technologies, fertilizers etc. From abroad.

(2) Efficient Resources

  • It is said that under international trade,
  • Countries produce what they can produce efficiently
  • And rest the other activities too other nation
  • In which they can work efficiently.
  • This helps the different nations to distribute the activities and work efficiently in their areas.

(3) Growth and Employment Potentials

  • International trade helps in faster growth of organizations as well as countries.
  • Sometimes organizations are not able to create employment in the market,
  • As they produce on small scale.
  • Initially countries like China, Japan, South Korea
  • Taken the whole world as a single market for trade.
  • This helped them in employment generation across the world.

(4) Standard of Living

  • Due to these people in one country are able to enjoy the goods and services of other nations.
  • This helped them in improving the standard of living.

Difference Between Domestic and International Trade

BasisDomestic TradeInternational Trade
Nationality of Buyers and SellersUnder this person of one nation work in their respective domestic market.Under this person from different nations works in the international market.
Nationality of Other StakeholdersStakeholders like suppliers, producers, employees, Middleman, etc. are of the same nation.Stakeholders like suppliers, producers, employees, Middleman, etc., are of different nations
Mobility of Factors of ProductionFactors of production like capital and labour are mobile across one nation.Factors of production like capital and labour are mobile across the different nation.
Heterogeneous CustomersUsually, customers are homogeneous in the domestic marketCustomers are not homogeneous in the international market due to a different religion, caste, language, etc.
RisksUnder this one nation is subject to the political risk of its respective nation.This may be a barrier to international trade as different nations have different political risks.
PoliciesThese are subject to different policies and regulations, laws of a single nation.These are subject to different policies and regulations, laws of multiple nations.
CurrencyOnly one currency is involved.There is involvement of more than one currency.

Advantages and Disadvantages of Licensing and Franchising

Advantages of Licensing and Franchising

(1) Nature

  • Under this system licensor/franchisor invests
  • Their own money in setting up their busies,
  • There is no cost of investing the funds abroad
  • So, it is less expensive than in other modes.


  • The whole business is owned and managed by the local person
  • Then government interventions or takeovers do not take place.

(3)existing Contracts

  • Since the business under licensing or franchising is managed by the local people.
  • His existing contacts become helpful in marketing operations.

Disadvantages of Licensing and Franchising

(1) Competition

  • When the brand become popular after licensing or franchising,
  • There is the threat of substitute products having slightly difference.
  • So, it increases competition

(2) Secrecy

  • If the business is not transacted properly,
  • Then confidential information can be leaked to competitors in the foreign market
  • Due to which the licensor can suffer stiff competition or losses.

(3) Litigations

  • It is of no doubt that,
  • Conflicts will arise among the licensor and licensee
  • On the factors like maintenance of accounts, payment of royalty, etc.
  • This can lead to costly long litigations.

The above mentioned is the concept, that is elucidated in detail about ‘Meaning and Reasons for International Trade’ for the Commerce students. To know more, stay tuned to CoolGyan’S.