WHAT IS INTERNATIONAL TRADE? WRITE THE DIFFERENCE BETWEEN INTERNATIONAL AND HOME TRADE?

International Trade: The international trade can be defined as the act of export and import or transaction of goods and services between different countries of the world. International trade takes place in order to increase the economic efficiency of different countries.

Difference Between International And Home Trade:-

a) Mobility Of Labor: In home trade mobility of labor are freely from one place to another place within a country. While labor cannot move from one country to another due to language, traditions, customs, immigration law etc.

b) Problem Of Currency: In case of home trade there is no problem of currency because all the transactions take place in country currency. While in international trade, when goods are exchange between different countries then thus problem of currency arise because there is different currencies of different countries.

c) Transport Cost: In case of home trade the commodity moved from one place to another takes a less transport cost. But in international trade transport cost is more than home transport cost.

d) Trade Restrictions: In home trade there is no restriction on the movement of goods and services from one place to another. While in case of international trade there are several trade restrictions. The main restrictions are import license and quota system etc.

e) Government Concession: Generally the government provide the special concession of stimulate growth of a particular product in home trade. Such facilities are not provided for international trade of some commodity unless government want to export it.

f) Mobility Of Capital: people prefer to invest the savings in their own country for various reasons because he feels greater sense of security in his own country. While capital is immobile between two countries because they feel insecurity regarding their capital.

g) Human Capabilities: At home we can transfer labor to anywhere but in case of international trade we cannot do so. Because different people of different countries have different human capability. So this condition laid the foundation of import and export, because the labor of different countries are skilled in different things.

ADVANTAGES OF INTERNATIONAL TRADE

1) Acquisition Of Required Goods And Services: It is obvious that no country in the world can produce goods and services it requires. All countries depends upon each other. Therefore, they import and export to each other.

2) Availability Of Goods At Cheaper Rates: The foreign trade enables people to buy goods and services of high quality at cheapest available rates.

3) Inventions And Innovations: Due to competition in the world market each country tries to introduce inventions and innovations to stay in the market. In this way new quality innovations have come to existence.

4) Fall Of Price: A country can export their surplus goods to those which is in need of them so the home prices falls.

5) World Peace: Different countries export different things under the comparative advantage and specialization. Thus they avoid war and attempts to promote peace in the world.

6) Extension Of Means Of Transport: When a country starts trade with another country then the exchange of goods takes place from one country to another. It leads to the extension of means of communications.

7) Extension Of Market: In it every country want to produce in large scale and in this way market has extended.

8) Emergencies: In case of emergencies there is shortage of food and other essential commodities in a country. Now these can easily imported from other country.

DISADVANTAGES OF INTERNATIONAL TRADE

1) Effect On Domestic Industries: If no restrictions are placed on the foreign trade, it may ruin the domestic industries and cause widespread distress among the people.

2) Effect On Consumption Habits: Sometimes it so happens that the traders in order to make profits imports commodities which are very harmful and injurious to the people.

3) Danger For Independence Of Poor Countries: In the past, the independence of some countries was over powered by imperialist forces under the grab of trade relations with them. For example, India lost its independence to Britain.

4) Smuggling Of Drugs: Foreign trade has led to the smuggling of drugs like heroine, optimum, brown sugar etc.

COMPARATIVE COST THEORY AND ITS ASSUMPTION AND CRITICISE IT

Comparative Cost Theory: This theory was developed by Ricardo in 1917. Basically from this theory we are able to gather main points.

1) How it is beneficial to trade with the rest of the world.

Definition: It can be defined as a country should be specialized in the production of that commodity which uses few resources then his trading partner (other country). In the words of Ricardo nations should not waste their limited sources in producing the commodities which they can obtain from abroad at lesser costs.

Explanation: Trade can take place even if one country unjoyful advantages in the production of both commodities then his trading partner. This country will no be exporting both the commodities. But it will prefer to specialize and export the commodities in which it has comparative advantages and produce it at lower cost than his trading partner. The other country will specialize and export the commodity in which it has lesser advantage and can produce it at lower cost. In this way international trade takes place between the countries. We can explain it with the help of following example;

Example: Cost Of Production

Country	Units of labor per day	Sugar	Wheat	Ratio of cost
A	1	16	16	1:1
B	1	12	6	1:1/2

In above table we see that country A is at clear advantage in the production of both commodities as compare to B, which is at clear disadvantage. In above we see that country A one unit of sugar can be exchanged for one unit of wheat. But in country B it cannot be exchanged. This shows that wheat is produced at lower cost in country A as compare to country B. Thus country A is specialize in its production and export it. On the other hand country B, we see that one unit of sugar can be exchanged for ½ unit of wheat. However, in country A for the same amount of sugar only one unit of wheat could be exchanged. This shows that country B has lesser disadvantage in the production of sugar and export it. In this way international trade takes place between different countries and countries benefit from such trade. The gain from such trade in shown below;

World Production Before Trade

Country	Unit of labor per day	Sugar	Wheat
A	2 (1+1)	16	16
B	2 (1+1)	12	6
Total production before trade	4	28	22

World Production After Trade

Country	Unit of labor per day	Sugar	Wheat
A	2	/	32
B	2	24	/
Total production after trade	4	24	32

From above it is clear that there has been an increase in the world trade as a whole. It is evident that the production of wheat increased by 10 units although the production of sugar has gone down by 4 units. Never the less there has been on increase in the world trade as a whole.

ASSUMPTIONS: The comparative cost theory is based on following assumptions:

1) Only two countries are involved in trade.

2) Economics are limited in the production of only two commodities.

3) There should be free trade between the nations.

4) No transportation cost exist.

5) Cost of production consist of only labor cost.

6) This theory is based on law of constant cast.

7) Labor is mobile inside the country but immobile in industries.

8) Taste, performance and demand pattern is ideated.

CRITICISIM: This theory is criticized on following grounds;

1) Labor is not a sole factor of production.

2) No constant cost.