International Trade 1

A trade involving the exchange of goods and services between two or more countries.

If the exchange is between two countries only, then it is referred to as bilateral trade, but if it is between more than two countries then it is referred to as multilateral trade.

Advantages of International Trade

It enable the country to get access to wider range/variety of goods and services from other countries

It enable the country to get what it does not produce

It helps in promoting peace among the trading countries

It enable the country to specialize in its production activities where they feel they have an advantage

It earns the country revenue through taxes and licenses fees paid by the importers and exporters in the country

It enable the country to dispose of its surplus goods and services thereby avoiding wastage

It creates employment opportunities to the citizens of that country either directly or indirectly

It may lead to the development of the country through importation of capital goods in to the country

It encourages easy movement of factors of production across the borders of the countries involved

It enable countries to earn foreign exchange which it can use to pay for its imports

A country may be able to obtain goods and services cheaply than if they have been produced locally

During hard times or calamities such as wars, the country is able to get assistance from the trading partners

It brings about competition between the imported and locally produced goods, leading to improvement in their quality

It gives the country an opportunity to exploit fully its natural resources, due to increased market

Disadvantages of International trade

It may lead to collapse of the local industries, as people will tend to go for the imported goods. The collapse may also lead to loss of employment

It may also lead to importation of harmful foods and services such as drugs and pornographic materials

May lead to over depending on imported commodities especially the
essential ones, making the country to be a slave of the other countries,interfering with their sovereignty

It may make the country to suffered during emergencies if they mainly rely on the imported goods

May make the country to suffer from import inflation

May lead to acquisition of bad culture from other countries as a result of their interactions

May lead to unfavorable balance of payment, if the import is higher than exports.

Terms of Trade

This refers to the rate at which the country’s export exchanges with those from other country.

That is:

Terms of trade = price index of exports/imports

It determine the value of export in relations to import so that a country can know whether it’s trade with the other country is favourable or unfavourable.

Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange from other countries For example;

Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan government exporting and importing to and from
china, and China also importing and Exporting from and to Kenya.

Year Average prices of export
Kenya China
2004 1000 4000
2005 1200 6500

Calculate the Terms of trade for;

i. Kenya

ii. China

Solution:

Kenya

a) Export price index (E.P.I) = average prices of exports in the current year/average prices of exports in the base x 100

=1200/1000 x 100

= 120%

b) Import price index (I.P.I) = average prices of imports in the current year/average prices of imports in the base x 100

=6500/4500 x 100

= 162.5%

c) Terms of trade (T.O.T) = export price index/import price index x 100

120/162.5% x 100

= 73.8% =

This implies that Kenya is importing from China more than it is exporting, leading to unfavourable terms of trade i.e. when the percentage is less than
100%, it implies unfavourable terms of trade.
China (work out).

The average prices is the various prices of the individual export or import items divide by their number.

Factors that may lead to either favourable or unfavourable terms of trade

The country is experiencing a favourable terms of trade if:

The prices of imports decline

and those of export remains the constant

The prices of imports declines while those of exports increase

The price of imports remains constant while those of exports increase

The prices of import and export increases but the rate of increase in export is higher

Both prices decrease but the decrease in import prices is higher

The country will experience unfavourable terms of trade if;

Prices of import increases while those of exports decline

Prices of import remains constant while those of export declines

Prices of import increase as the export remains constant

Both prices increase, but for imports increases at a higher rate than export

Both prices decrease, but for export decreases at a higher rate than import

Reasons for differences in terms of trade between countries

The terms of trade may differ due to:

i. The nature of the commodity being exported. If a country exports raw

materials, or unprocessed agricultural products, its terms of trade will be unfavourable, as compared to a country that exports manufactured goods

ii. Nature of the commodity being imported. A country that imports manufactured goods is likely to have unfavourable terms of trade as
compared to that which imports raw materials or agricultural produce

iii. Change in demand for a country’s export. An increase in demand for the country’s export at the world market will make it have favourable terms of trade as compared to those with low demand at the world market

iv. Existing of world economic order favouring the products from more developed countries.

This may make the developing countries to have
deteriorating terms of trade

v. Total quantity supplied. A country exporting what most countries are exporting will have their products trading at a lower price, experiencing unfavourable terms of trade as compared to a country that export what only few countries export

vi. Trade restrictions by trading partners. A country with no trading restrictions is likely to import more products, leading to unfavourable
terms of trade, as compared to if it impose trade restrictions Balance of trade

This is the difference between value of country’s visible exports and visible imports over a period of time. If the value of visible/tangible export is higher than the value of visible/tangible imports, then the country experiences favourable terms.

If less than the invisible value, then the country is experiencing unfavourable.

The country is at equilibrium if the value of
visible export and import is the same

Balance of payments

This is the difference in the sum of visible and invisible export and the visible and invisible imports.

If positive then it means the country is having
favourable terms, while if negative, then it means unfavourable It goes beyond the balance of trade in that it considers the following.

The countries visible/tangible export and import of goods (visible trade).

The countries invisible/services exported and imported in the country (invisible trade)

The inflow and outflow of investment (capital goods)

Balance of Payment account

This is the summary showing all the transactions that have taken place between a particular country and the rest of the world over a period of time.

The transaction may arise from

a) The export of visible goods

b) The import of visible goods

c) The export of invisible goods/services

d) The import of invisible goods/services

e) Flow of capital in and out of the country
Components of balance of payments account

The balance of payment account is made up of the following

a) Balance of payment on current account

ii) Balance of payment on capital account

iii)Official settlement account/Cash account/foreign exchange transaction account

Balance of payment on current account

This is the account that is used to determine the difference between the value of the country’s visible and invisible imports and exports.

That is

Balance of payment on current account = (visible export + invisible export) –
(visible import + invisible import)

In the account, the payments for the visible and invisible imports are debited while the receipts from visible and invisible exports are credited that is

Dr current

Payments for imports
(Visible and Invisible)

account Cr

Receipts from exports
(Visible and Invisible)

International Trade 1 | International Trade 2 |
International Trade 3 | International Trade 4 |