International Trade

International trade plays a vital role in an economy, helping to increase its Gross Domestic Product or GDP by a substantial margin. In turn, it is responsible for facilitating both growth and economic development which is not limited to just one nation.

With the emergence of newer technology, better means of communication and enhanced infrastructure, tapping into the potential of international trade has become easier. 

On that note, let’s check out the meaning of international business and all about its crucial aspects!

What is International Trade?

As per the definition of international business, it is described as the sale and purchase of goods and services which is not limited to a country’s geographical boundaries. It is also known as “trade between two countries”. 

Notably, it does not just involve the movement of goods and services internationally. It also includes factors like capital, intellectual property and technology, among others. 

There are three types of international trade –

  1. Import

  2. Export

  3. Entrepot or Re-export

Features of International Trade

These pointers below highlights the nature of international business –

  1. Intense competition.

  2. Existence of several mediators.

  3. The regional specialisation is a basis of international trade.

  4. Adherence to both local and international laws.

  5. Exposure to government control.

  6. Lengthy documentation process.

  7. Buyers and sellers are separated based on their country.

  8. Unanimously accepted currency is used.

Test Your Knowledge:

Which of these Items is not Exported by India?

a) Basmati rice

b) Gems and jewellery 

c) Oil and petroleum 

d) Textile

Do you know the reasons why countries indulge in international business? If no, then read along to find out more about them.

Reasons for International Trade

Typically, there are 4 major reasons for international trade –

1. Production

Since countries on their own would fail to produce quality products at a reasonable cost, they are independent of one another significantly.

2. Unequal Distribution of Resources

Resources are limited. Also, not all geographical regions are blessed with substantial resources to produce everything the consumers need.

3. Factors of Production

Cost of factors of production like raw material, capital, labour, etc. are available at different rates in different countries. 

4. Cost of Production

The cost of production tends to vary from one region to another. The primary reason behind it is the disparity in the concentration of available resources, along with the cost of factors of production in different areas.

 

These encourage producers to make the most of production-friendly aspects of other regions through trade. In turn, it paves the way for internal trade across countries. 

With that being said, let’s now try to weigh the importance of international trade by analysing its pros. 

Advantages of International Trade

Here are some of the significant benefits of international trade on nations and producers –

A. For Nations

Foreign Exchange Earnings

International business helps to generate foreign exchange which comes in handy for meeting future requirements pertaining to cost-effective factors of production. 

Optimal Use of Resources

International trade encourages specialisation in production. In such a setup a country only produces goods and services it has enough resources for, and trade the surplus with other countries. This, in turn, ensures optimal use of available resources and further helps distribute goods and services across the globe. 

Improvement in Both Growth and Employment Opportunities

Most developing countries serve as an excellent source of factors of production, which includes land, labour, technology and capital. International businesses do not just benefit their firm’s production but in turn, helps generate ample employment opportunities for the locales.

Improvement in Living Standards

Such a trade set up enables consumers to enjoy a vast selection of goods and services. It offers them ample choice. Resultantly, it enhances their standard of living as well. 

B. Business Firms

Increase in Production Capacity

The international business enables producers to make the most of their production capacity and tap into the economies of scale. In turn, it helps them to increase their profit margin on each unit of a product significantly while indirectly helping to lower the overall cost of production. 

Greater Earnings

In most situations, international business is considered to be relatively more profitable than domestic trade. In a situation wherein the cost of goods and services are low in the domestic market, business owners can earn more by selling them in foreign markets. 

Significant Growth Prospect

Business firms who operate exclusively within the national boundaries are often facing stagnation in the demand of their goods. On the other hand, firms who partake in international trade have a greater opportunity to expand their prospects and market their product internationally. 

Combats Competition 

It can be said that international trade serves as a means to facilitate growth for those firms which find themselves amidst throttling market competition. It proves useful in escaping the intense competition of the domestic market. 

Task 1 – Find out the disadvantages of international business and list them accordingly in your own words! 

Scope and Importance of International Business

Now let’s quickly glance through the scope and importance of international business.

  1. Scope of International Trade

  1. Export and import of merchandise

  2. Export and import of services

  3. Foreign investment - direct investment and portfolio investment 

  4. licensing and franchising 

Task 2 – Find out about the different modes of entering into international trade. Subsequently, learn about their advantages and disadvantages. 

  1. Significance of International Trade

These pointers offer an overview of the significance of the concept of international trade –

  1. Aids in effective utilisation of available raw material.

  2. It provides consumers with ample choices.

  3. Helps to specialise and economise scale of production.

  4. It promotes growth and development of the global economy.

Find out about the basic difference in the domestic and international business meaning and much more from this table below.

Differences Between Domestic Trade and International Trade

Parameters

International Business

Domestic Business 

Buyers’ and sellers’ nationality

They do not belong to the same country.

They belong to the same country

Mobility of production factors

There are certain restrictions on mobility.

They can move freely within the boundaries of their country. 

Market composition 

It lacks homogeneity.

Significantly more homogenous.

Political system 

It has to adhere to the political system of several countries.

It is subjected to the political system of one country.

In case you want to learn more about international trade definition, refer to Vedantu’s study materials and improve your knowledge significantly. Also, by joining our free live online classes, you would gain more insight into the nature and scope of international business and benefit your exam preparation. Download our Vedantu App now!


FAQ (Frequently Asked Questions)

1. What is International Trade?

As per international trade definition, one can define international business as the exchange of consumer goods and services across nations.

2. What is the Meaning of Trade?

 Trade can be simply defined as the sale and purchase of goods and services. In the broad sense there are two types of trade, namely, domestic trade and international trade.

3. What are Some Examples of International Trade?

The exchanges of natural resources, materials, finished goods, e-commerce, value-added resellers, etc. across countries are examples of international trade. For instance, petroleum is one of the biggest exports in India.

4. List two Nature and Scope of International Trade.

Nature or characteristic of international trade includes – intense market competition and adherence to local and international trade norms. On the other hand, the scope of international trade includes - Import and export of merchandise and service.