International Trade: Meaning And Theory

International trade is the process of buying and selling between people of different countries.

No nation can afford to be an island of its own, nations like individuals, obey the theory of interdependence of living things.

This implies that nations just like humans, depend on others for one thing or another.

People move from one place to another with the aim of satisfying their needs.

It is the desire to get to another country in pursuit of means to satisfy needs which could be in form of new products, cheap or better quality products that gave rise to international trade.

Meaning of international trade 

International trade is the process of buying and selling between people of different countries.

It can be described as all activities relating to trading between merchants of two nations and or government of one country and the other.

You can also define international trade as a trade across national frontiers.

It evolves from the very basic of human life, which is that no one individual is completely self sufficient.

In the same form, there’s no country in the world no matter how little or big that is self reliant.

Every country must be involved in import and export to keep its economy going.

This is the reason behind trade between economically advance countries and less developed countries.

In recent years, international trade has grown in importance to where it now constitute a major portion of the total activities of many business firm.

Factors responsible for international trade

International Trade


Many factors can be adduced for international trade among which are;

1. Natural Endowment 

Some countries are naturally more endowed than others.

Such factors include mineral deposit, water resources, land, forest etc.

These resources are not the same pro portion among nations.

For example, a country like Nigeria has huge deposit of oil and gas and some other minerals.

Those in need of them but do not have them must trade with other countries with view to having the required goods.

2. Efficiency in harnessing the resources of international trade 

One thing is to be naturally endowed with lots of resources, while the other is to be fully equipped to effectively tap the resources.

It is a fact that ability to harness these resources are not equal among countries hence the coming of foreigners to assist.

The degree of development and acquisition of improved production methods vary among countries.

A country will only be efficient in the production of those goods and services to which nature has endowed her with most of the inputs or those which has attained great Proficiency.

This implies that some countries can produce certain goods at a cheaper rate.

3. Income and Taste 

Another factor responsible for international trade is income and taste.

Hight income induces high taste, in other words, taste tends to increase or improve as income increases.

There exist diffrence in demand which is a product of diffrence in income and taste.

The difference in demand invariably create room for international trade.

4. Climatic condition of countries 

Some countries have physical impossibility in the production of certain goods.

Some goods have weather preferences for its growth, such like apple, tomatoes, etc require cold weather to grow.

While others like yam, cassava, cotton etc grow in the tropical countries.

Those in need of of goods that cannot be obtained locally must as a matter of fact, import from countries that are able to produce them.

5. Risk and return consideration 

The need to diversify in order to reduce risk do give rise to international trade.

Same is applicable to returns, and most people and organization engage in international trade for expected higher returns.

6. Culture in international trade 

Outside economic reasons, there are cultural and humanistic reasons for international trade.

It recognizes the mutual interdependence of countries of the world.

Countries tend to develop the spirit of give and take.

Through international trade, countries come to appreciate and respect other country’s culture thereby creating room for peace in the world.

Theory of international trade 

From the definition of international trade and factors responsible for it, we have seen the need for international trade.

This trade has been in the existence of nationhood and its nature and scope have been changing in line with the changing world economic orders.

It’s long existence notwithstanding, it was in the 18th and 19th century that economist began to develop theory for international trade.

Their theory centered around knowing

  1. Why international trade take place
  2. What are the gains from it

Their theory was based on the doctrine of cost difference to which comparative cost is a special case.

It was Adam Smith who in his book The wealth of the nations published in 1776 postulated that countries should specialize in the production of commodities or services for which they have absolute cost advantage over others.

This implies that if it take 10 man hours to produce one carton of noddles, and 5 man hour to produce 2 carton of coffee, 5 man hour for one carton of noodles in another country.

Trade between the two countries will be beneficial if the cou that specializes in the production of coffee, for which it has absolute cost advantage over another country who on the other hand should produce noddles.

Since they are in trade to make profit, the absolute cost di between them is a justified reason for trade.

Furthermore, David Ricardo worked on this theory to propound the theory of comparative advantage.

This theory states that even where one country has absolute cost advantage over the other in the production of both commodities.

Trade between them could still be profitable if each country specialize in the prod of the commodity in which she has comparative cost advantage over the other.

Comparative advantage in goods will arise if the opportunity cost of producing it by a country is lower than that of other countries.

Barriers to inter trade 


Trade between different countries faces many problems, they include;

1. Differences in currency 

Most countries of the world have their national currencies.

This means that the trading countries may have different monetary units.

For example, United States uses dollar, India uses rupee, Nigeria uses naira , Britain uses pounds etc.

However, this problem is tackled by the use of foreign exchange rates. The value of the currencies is fixed in relation to each other.

2. Natural barriers 

These includes distance, the presence of sea, deserts etc, separating the trade partners.

Countries trading with each other may be thousand of kilometers apart or may be separated by other natural barriers.

These leads to higher transport costs, and also goods may take several days or weeks to reach their destinations.

However, the development of modem means of transportation and communication has gone a long way in facilitating international transaction.

3. Artificial barriers 

There are several artificial barriers which constitute problems to international trade.

The government of various trading countries may use trade restrictions such as quotas, tariff, and embargo on imported goods.

This factor, together with the presence of natural barriers, makes the mobility of factors of production and commodities across international boundaries difficult.

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This is what international trade is all about, the meaning and the factors responsible for it and the barriers.

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