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Reasons for International Trade Domestic Non-availability International trade is the exchange of goods and services between countries.

An import is the UK purchase of a good or service made overseas. An export is the sale of a UK-made good or service overseas. A nation trades because it lacks the raw materials, climate, specialist labour, capital or technology needed to manufacture a particular good. Trade allows a greater variety of goods and services. Principle of Comparative Advantage The principle of comparative advantage states that countries will benefit by concentrating on the production of those goods in which they have a relative advantage. For instance, France has the climate and the expertise to produce better wine than Brazil. Brazil is better able to produce coffee than France. Each country benefits by specializing in the good it is most suited to making. France then creates a surplus of wine which it can trade for surplus Brazilian coffee. Protectionism Rationale /Advantages of Protectionism Protectionism occurs when one country reduces the level of its imports because of: Infant industries. If sunrise firms producing new-technology goods (eg computers) are to survive against established foreign producers then temporary tariffs or quotas may be needed. Unfair competition. Foreign firms may receive subsidies or other government benefits. They may be dumping (selling goods abroad at below cost price to capture a market). Balance of payments. Reducing imports improves the balance of trade. Strategic industries. To protect the manufacture of essential goods. Declining industries. To protect declining industries from creating further structural unemployment. Disadvantages of Protectionism

Prevents countries enjoying the full benefits of international specialization and trade. Invites retaliation from foreign governments. Protects inefficient home industries from foreign competition. Consumers pay more for inferior produce. Protection Methods Tariffs Tariffs (import duties) are surcharges on the price of imports. The diagram below uses a supplyand-demand graph to illustrate the effect of a tariff.

Note that the tariff raises the price of the import; reduces the demand for imports; a encourages demand for home-produced substitutes; raises revenue for the government. Quotas

Quotas restrict the actual quantity of an import allowed into a country. Note that a quota: raises the price of imports; reduces the volume of imports; encourages demand for domestically made substitutes. Other Protection Techniques Administrative practices can discriminate against imports through customs delays or setting specifications met by domestic, but not foreign, producers. Exchange controls (currency restrictions) prevent domestic residents from acquiring sufficient foreign currency to pay for imports ADVANTAGES OF INTERNATIONAL TRADE Various advantages are named for the countries entering into trade relations on a international scale such as: A country may import things which it cannot produce International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade. Maximum utilization of resources International trade helps a country to utilize its resources to the maximum limit. If a country does not takes up imports and exports then its resources remain unexplorted. Thus it helps to eliminate the wastage of resources. Benefit to consumer Imports and exports of different countries provide opportunities to the consumer to buy and consume those goods which cannot be produced in their own country. They therefore get a diversity in choices. Reduces trade fluctuations By making the size of the market large with large supplies and extensive demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable. Utilization of Surplus produce International trade enables different countries to sell their surplus products to other countries and earn foreign exchange. Fosters International trade International trade fosters peace, goodwill and mutual understanding among nations. Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them.

DISADVANTAGES OF INTERNATIONAL TRADE International trade does not always amount to blessings. It has certain drawbacks also such as: Import of harmful goods Foreign trade may lead to import of harmful goods like cigarettes, drugs etc, which may run the health of the residents of the country. E.g. the people of China suffered greatly through opium imports. It may exhaust resources International trade leads to intensive cultivation of land. Thus it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources. Over Specialization Over Specialization may be disastrous for a country. A substitute may appear and ruin the economic lives of millions. Danger of Starvation A country might depend for her food mainly on foreign countries. In times of war there is a serious danger of starvation for such countries. One country may gain at the expensive of Another One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. The Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century. It may lead to war Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and Second World War.

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