International Trade – SS3 Economics Lesson Note (First Term)

International trade is the exchange of goods and services between at least two different countries, through imports and exports.

Behavioural objectives

1. Explain the meaning of domestic and international trade.
2. State the reasons for and types of international trade.
3. State the barriers to international trade.
4. Highlight the differences between domestic and international trade.
5. Outline the advantages and disadvantages of international trade.

What is domestic trade?

Domestic trade is the buying and selling of goods and services within the boundaries of one country, such as Nigeria.

• Wholesale trade: selling goods in large quantities, usually to retailers.
• Retail trade: selling goods in small quantities to final consumers.
• Scope: it includes all trading, selling and buying activities of every type within a particular country.

What is international trade?

International trade is the exchange of a good or service between at least two different countries.

• Import: a good or service brought into the home country from another country.
• Export: a good or service sold to a foreign country.
• Why it exists: countries differ in resources, climate, skills and technology, and no country is self-sufficient.

What are the types of international trade?

There are two types of international trade: bilateral trade and multilateral trade.

Bilateral trade

• Meaning: exchange of goods and services between two countries only.
• Balance: each country tries to balance its payments and receipts with the other.

Multilateral trade

• Meaning: trade in which a country exchanges goods and services with many other countries.

What are the similarities between international trade and internal trade?

Both forms of trade share five main features.

• Money: both use money as a medium of exchange.
• Specialisation: both involve some degree of specialisation between trading partners, which is the basis of exchange.
• Buying and selling: both involve the buying and selling of goods and services.
• Unequal endowments: both arise from the unequal distribution of natural endowments and production resources.
• Middlemen: both involve the activities of middlemen.

What are the differences between international trade and internal (domestic) trade?

Internal trade takes place inside one country, while international trade crosses national borders.

• Internal (domestic) trade: trade among people and firms within one country, using one currency.
• International trade: trade between countries, which involves different currencies, laws and restrictions.

What are the reasons for international trade?

Countries trade with one another for nine main reasons.

• Natural resources: minerals are unevenly spread among nations. Nigeria has coal and crude oil, Ghana is endowed with bauxite and Canada with nickel.
• Climate and soil: differences in climate and soil give rise to the cultivation of different crops.
• Capital stock: differences in capital determine the quantity and variety of goods and services each country can produce.
• Labour skills: countries differ in the volume and quality of labour available for productive activities.
• Technology: technologically advanced countries produce more industrial goods. Japan is good in electronic goods, Germany in Mercedes Benz cars, Switzerland in watches and China in a variety of items.
• No self-sufficiency: no country has attained it. Nigeria imports cars, radios and watches from Japan, while Japan buys Nigeria’s petroleum. Wants a country cannot satisfy by its own production call for exchange across countries.
• Wider market: nations need a larger market for their goods and services.
• Cost of production: costs differ from one country to another. A country will import a good if it is cheaper to do so than to produce it.
• Standard of living: nations want to improve the standard of living of their citizens.

What are the barriers to international trade?

Barriers to international trade are factors that make trade between countries difficult, slow or costly.

• Differences in currency: traders must exchange one currency for another before they can pay.
• Natural barriers: distance, seas and deserts raise transport costs and delay delivery.
• Differences in language: buyers and sellers may find it hard to negotiate and understand contracts.
• Trade restrictions: some nations limit trade with tariffs (taxes on imports), quotas (limits on quantity) and embargoes (bans on trade).
• Documentation: processing of documents for foreign trade is long and sometimes difficult.
• Political ideologies: the political beliefs of different countries can hinder trade between them.
• Weights and measures: countries may use different units of weights and measures.

What are the advantages of international trade?

International trade has eleven main advantages for nations.

• Revenue: it is a source of revenue for nations.
• Higher world output: it increases the total world output of goods and services.
• Wider market: it provides a wider market for goods.
• Better living standards: it enhances a better standard of living in many nations.
• Interdependence: nations depend on one another, which is a prospect for world peace and international goodwill.
• Employment: it provides employment opportunities for exporters and importers.
• Efficient resource use: it leads to a more efficient allocation of world productive resources.
• Specialisation: it promotes specialisation, division of labour and efficiency in production.
• Growth: it enhances world economic growth and social progress.
• Foreign investment: it leads to increased foreign investments in developing nations, including those in West Africa.
• Check on monopoly: imported goods bring competition, which limits private monopoly power.

What are the disadvantages of international trade?

International trade has seven main disadvantages.

• Over-dependence: a country may depend too much on other countries.
• Infant industries: it negatively affects the growth of young local industries.
• Cultural harm: it can harm the cultural and moral values of a country and lead to decadence in social norms, for example indecent and immoral fashions imported into Nigeria.
• Less self-sufficiency: it can reduce a nation’s efforts toward attaining self-sufficiency.
• Unemployment: high importation may reduce the production of domestic industries and so generate unemployment.
• Payments deficit: unrestricted foreign trade may lead to a deficit when imports are higher than exports.
• Dumping: less developed countries may become dumping grounds for all kinds of goods, including dangerous and harmful ones such as arms, ammunition and alcohol.

Evaluation

1. Define domestic and international trade.
2. State four reasons for international trade.
3. Explain the types of international trade.
4. Highlight four barriers to international trade.
5. State three advantages and three disadvantages of international trade.

Assignment

Explain five differences between domestic trade and international trade, and give two reasons why Nigeria trades with other countries.