Internal and External Trade - What is the Difference?
Trade is said to be an economic concept that is involved with buying and selling of goods or products. Trade is carried out between two or more entities which can be an individual or a business entity.
Trade Can be of Two Types:
Internal Trade
External Trade
Internal trade is the trade that is performed between parties within the political and geographical boundaries of a country, while external trade is the trade that is carried out between two parties that are outside the country’s borders or between two nations.
Distinguish Between Internal Trade and External Trade
Following are the main points of difference between internal trade and external trade:-
Types of Internal Trade
Internal trade and external trade are classified into different types of trades. That being said, internal trade can be divided into two categories:
Wholesale Trade:
It is the trade in which products and services are sold at a huge level and in bulk quantities. The owner of this trade is termed as a wholesaler. He buys the products in bulk from the manufacturer and sells them to the retailers in small lots. The wholesaler acts as a middleman between the manufacturer and the retailer.
Retail Trade:
This trade involves the sale of goods in small lots to the final consumption. A person who buys the goods and sells them to the ultimate customer is called a Retailer.
Types of External Trade
External Trade Can be Classified into the Following Types of Trades:-
1. Import: The trade is conducted when one nation purchases goods from another nation. For example, portable LED Lights and USB desk lamps imported from china, surgical items imported from China, Dry Fruits imports from Afghanistan, Garlic grater, and cutter, etc. generally when you visit the departmental store then you look at these types of goods and often salesman provides information that these gods are imported or made in China and so on.
2. Export: It implies selling goods and services to other nations. Stitched and unstitched garments are exported to Dubai from India; Cereals like bread, wheat, oats, rye, etc. are also exported to the UAE. India earned about 523902 thousand dollars from UAE in FY 2017 by exporting cereals.
3. Entrepot: When a nation buys goods or services with the key objective to sell them to another country is referred to as an entrepot. It is also called export. For example, India entrepot different chemical products to manufacturing industries all over the world.
Therefore, in internal trade traders conduct activities in reference to the sale and purchase of goods and services within the boundaries of the nation. On the other hand, trading worldwide or trade between two or more countries is called International Business. Some people regard it as external trade since countries are dealing in products and services across geographical limits.
FAQs on Difference Between Internal Trade and External Trade
1. What is the primary difference between internal trade and external trade?
The primary difference lies in the geographical scope. Internal trade, also known as domestic trade, involves the buying and selling of goods and services within the national boundaries of a country. In contrast, external trade, or international trade, refers to the exchange of goods and services between two or more countries, crossing national borders.
2. What are the main types of internal and external trade?
Both internal and external trade can be broken down into specific types based on the nature of the transaction.
Internal Trade Types: It is mainly divided into Wholesale Trade (buying in bulk from producers to sell to retailers) and Retail Trade (selling goods directly to the final consumer).
External Trade Types: It is classified into Import (purchasing goods from another country), Export (selling goods to another country), and Entrepot (importing goods not for consumption, but for re-exporting to another country).
3. Can you provide real-world examples of internal and external trade?
Certainly. A clear example of internal trade is a farmer in Punjab selling wheat to a flour mill in Karnataka. For external trade, an example would be India exporting software services from a company in Bengaluru to a client in the United States, or importing crude oil from Saudi Arabia to meet its energy needs.
4. What are five key differences between internal and external trade?
Besides the geographical scope, here are five key distinguishing factors:
Currency Used: Internal trade uses the domestic currency (e.g., Indian Rupee in India), while external trade involves multiple currencies and requires foreign exchange.
Regulations: Internal trade is subject to national laws, which are relatively simple. External trade faces complex international laws, customs duties, tariffs, and trade barriers.
Risk Factor: Risks in internal trade are lower. External trade involves higher risks, including currency fluctuation, transportation across long distances, and political instability.
Transportation: Internal trade primarily uses road and rail transport. External trade heavily relies on sea and air transport, which is more complex and costly.
Market Homogeneity: Internal markets are relatively homogeneous in terms of language, culture, and preferences. External markets are heterogeneous, requiring product and marketing adaptations.
5. Why is external trade more complex and regulated than internal trade?
External trade is more complex because it operates across different sovereign nations, each with its own economic policies, legal systems, and political environments. Key complexities include the need to manage foreign exchange rates, comply with customs procedures and documentation for imports and exports, navigate varying trade laws, and handle international logistics. These factors are absent in internal trade, which operates under a single, unified legal and economic framework.
6. How do government policies impact external trade more significantly than internal trade?
Government policies have a more profound impact on external trade because they are used to regulate the flow of goods and protect domestic industries. Governments implement specific tools for external trade like tariffs (taxes on imports), quotas (limits on the quantity of imported goods), and trade agreements. Political relations between countries can also lead to trade sanctions or favourable trade status, directly affecting external trade volumes. Internal trade, while regulated, is generally promoted to ensure a smooth flow of goods within the country and is not subject to such international political and protective measures.
7. What is the importance of having both internal and external trade for a country’s economy?
Both types of trade are vital for economic health. Internal trade ensures the efficient distribution of resources, goods, and services within a nation, promoting balanced regional development and providing employment. External trade is crucial for earning foreign exchange, accessing goods and technologies not available domestically (like advanced machinery or crude oil), and benefiting from specialization. A healthy balance between the two creates a resilient and growing economy.
8. Is 'local trade' the same as 'internal trade'? Explain the distinction.
No, they are not the same, but one is a part of the other. Local trade refers to transactions confined to a very small geographical area, such as a village, town, or district. It is the most basic level of commerce. Internal trade is a much broader concept that encompasses all trade within a country's borders, including local trade, regional trade (between districts), and inter-state trade (between states like Maharashtra and Gujarat). Therefore, local trade is a component of internal trade.
