What is International trade/ foreign trade? Meaning, purpose & types

Meaning of International Trade:

International trade is the relationship between different countries for the purpose of trade and commerce. It comprises Imports (buying from another country) and Exports (selling to another country. The trade taking place may be of goods like garments, agricultural products, gems, petroleum etc., or of services such as inviting and/or sending people who possess technical knowledge and expertise like a doctor, diplomat, engineer etc. (Read what is a letter of credit)

Purpose of foreign/international trade:

The answer is pretty simple. Since not everything that the residents need is available or available in adequate quantities in a country, there is a need to purchase (import) from the countries that have more or surplus of that product. So, while countries need diamonds and gold more than they have, they inevitably import them from Africa. Similarly when a country has a shortage of professional engineers and doctors, it looks for professionals who are ready to immigrate. Secondly, there are times when a country has excess or surplus of a product or service which will be wasted if not sold to other countries. We can think of China exporting huge volumes of steel to its Asian neighbours because it has more than it needs. Thirdly, if a country/ a tradesman feel that a particular product or service earns more abroad than in the home country, they are tempted to engage in exporting off such cash cows.

Types of international trade:

A. Based on agreement
  • Bilateral trade- if there is an agreement between two countries to buy and sell certain kinds of goods and services in exchange of money, it is called bilateral trade agreement. A country can have bilateral trade agreement with any number of countries.
  • Multilateral trade- if there is a trade agreement between more than two countries to buy and sell certain kinds of goods and services among themselves in exchange of money, it is called multilateral trade agreement. Any number of multilateral trade agreements can be signed by a country.
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Components of International Trade

B. Based on activity
  • Import trade- If a country purchases goods and services from another it is called an import trade for the purchasing country.
  • Export trade- If a country sells goods and services to another it is called an export trade for the selling country.
  • Entrepot trade- if goods and services are sent or received from a country for the purpose of sending to another country, it is called entrepot trade.

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