International trade is the transfer of capital, products, and services across international borders or territories to satisfy a requirement for commodities or services. When compared to local trade, carrying out international trade is a complicated operation. Currency, government policies, the economy, the legal system, laws, and markets all have an impact on commerce between two or more countries. A product that is exchanged or sold from an entity in one country to a client in another is an export from the originating nation and an import to the receiving nation. Consumers and countries are exposed to new markets and products as a result of global trade. Food, clothing, jewellery, wine, spare parts, stocks, oil, currencies, and water are just a few examples of products available on the international market. Tourism, banking, consultancy, and transportation are all examples of services that are exchanged. The international commerce system is influenced by advanced technology, transportation, globalisation, industrialisation, outsourcing, and multinational enterprises. You’re experiencing the effects of international commerce if you can stroll into a store and discover Indian bananas, Brazilian coffee, and a bottle of Italian wine. International commerce enables countries to increase their markets and obtain access to commodities and services which may rather be unavailable in their own country. The market has become more competitive as a result of international commerce which leads to more competitive pricing, and the consumer receives a fairly low-cost product.
Objectives of International Trade
The foremost objective of any trade is to earn profits by selling as much as possible products and services to collect the maximum revenue. International trade caters to this very objective. Access to international markets, there results in an expansion in the consumer base of a company’s products or services. Each nation that is added to the list paves the door for new income opportunities and business success to the corporations. From a consumer’s perspective, the objective that a person chases is that of maximum utility or satisfaction and this is catered to the consumer through international trade. As the consumer gets access to products and services at a lower cost than the alternatives available at the domestic market, the utilisation of the consumer’s hard-earned money is maximised. It is obvious that a nation can’t produce all the products, commodities and services needed and wanted by its citizens. But because of the existence of international trade nations can specialise in manufacturing a smaller variety of commodities, allowing for higher large-scale production efficiency and with the profits earned from these, the nation can import the other products and satisfy the demands of the public. International trade and commerce promote globalisation by bringing together the economies of many countries. It helps in establishing world peace via the development of commercial connections between nations. As more and more trade between different states is realised, states get more reluctant to go on a war with each other resulting in peaceful and harmonious relationships between the citizens of respective countries encouraging cross-national social and cultural management.
Theories of International Trade
International trade theory, a branch of economics that studies the patterns of international commerce, their origins, and their consequences for human wellbeing. As a tool of evaluating the consequences of trade policy, international trade theory and economics have evolved.
- Adam Smith’s model – Trade, according to Adam Smith, occurs as a result of countries having a comparative absolute advantage in the production of certain items. Absolute advantage, in Adam Smith’s theory, refers to the situation in which one country can manufacture a unit of a good with less labour than another.
- Ricardian model – In neoclassical trade theory, the Ricardian notion of comparative advantage became a key component. The Ricardian approach emphasises comparative advantage, which derives from technological or natural resource disparities. Factor endowments, like the relative quantities of labour and capital in a country, are not explicitly included in the Ricardian model.
- Specific factors model – The Ricardian model is extended by the specific factors model. Jacob Viner was interested in understanding why labourers migrated from rural to urban regions after the Industrial Revolution. Labour mobility between industries is conceivable in this model, but capital is believed to remain stationary in the short run. The term “specific factors” refers to the belief that certain sources of production, such as physical capital, are not easily transferable between sectors in the short run. According to the notion, if the price of a product rises, the owners of the component of production that produces that product earn in real terms.
- Heckscher-Ohlin model – Eli Heckscher and Bertil Ohlin, two Swedish economists, established an international trade theory in the early 1900s. According to the H–O model, variations in factor endowments drive the structure of international trade. It predicts that nations would export items that heavily rely on locally plentiful variables while importing those that heavily rely on locally limited elements.
- New trade theory – new trade theory aims to explain empirical aspects of trade that are difficult to explain using comparative advantage-based models. The fact that most commerce occurs between nations with similar factor endowment and productivity levels, as well as the huge quantity of multinational production (i.e., foreign direct investment) that exists, are examples of these factors. Monopolistic competition and growing returns to scale are common assumptions in new trade theories. The home-market effect claims that if an industry tends to cluster in one area due to returns to scale and if that business has high transportation costs, the industry will be situated in the nation with the majority of its demand in order to save money.
- New New trade theory – Marc Melitz introduced the New New Trade Theory in 2003 as a theory of international trade.It was revealed that the efficiency of enterprises in a country varies greatly, with international trade firms having better productivity than those producing just for the domestic market. The research drew a lot of attention since it was tailored to the Big Data era, and the tendency is now known as New New Trade Theory, in contrast to Paul Krugman’s New Trade Theory.
- Gravity model – The Gravity model of trade examines trading patterns more empirically. In its most basic version, the gravity model forecasts commerce based on the distance between nations and the interaction of their economic sizes. The model is based on Newton’s law of gravity, which takes distance and physical size into account. The model has been demonstrated to have strong empirical validity.
