what is foreign trade and why do countries of the world engage in it?

what is foreign trade and why do countries of the world engage in it?

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4 months ago
Foreign trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or
supply and demand , affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor , thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes.
Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import . Imports and exports are accounted for in a country's current account in the balance of payments.

Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources , countries can produce a surplus, and trade this for the resources they need.
Clear evidence of trading over long distances dates back at least 9,000 years, though long distance trade probably goes back much further to the domestication of pack animals and the invention of ships. Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialised world.
Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet it is the world’s fourth largest consumer of oil, and must import all it requires.
The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18th Century (in The Wealth of Nations, 1776), these being the division of labour and specialisation .
In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently. When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets. For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.
Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product. Hence, specialisation can generate further benefits in terms of efficiency and productivity.
Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries. International specialisation is increased when countries use their scarce resources to produce just a small range of products in high volume. Mass production allows a surplus of good to be produced, which can then be exported. This means that goods and resources must be imported from other countries that have also specialised, and produced surpluses of their own.
When countries specialise they are likely to become more efficient over time. This is partly because a country's producers will become larger and exploit economies of scale . Faced by large global markets, firms may be encouraged to adopt mass production, and apply new technology. This can provide a country with a price and non-price advantage over less specialised countries, making it increasingly
competitive and improving its chances of exporting in the future.
4 months ago
Foreign trade is nothing but trade
between the different countries of the
world. It is also called as International
trade, External trade or Inter-Regional
trade. It consists of imports, exports and
entrepot. The inflow of goods in a
country is called import trade whereas
outflow of goods from a country is called
export trade. Many times goods are
imported for the purpose of re-export
after some processing operations. This is
called entrepot trade. Foreign trade
basically takes place for mutual
satisfaction of wants and utilities of
  • Gaby: this are reason why countries in the world get engage in foreign trade.
    1. Division of labour and specialisation
    Foreign trade leads to division of labour
    and specialisation at the world level.
    Some countries have abundant natural
    resources. They should export raw
    materials and import finished goods
    from countries which are advanced in
    skilled manpower. This gives benefits to
    all the countries and thereby leading to
    division of labour and specialisation.
    2. Optimum allocation and utilisation of
    Due to specialisation, unproductive lines
    can be eliminated and wastage of
    resources avoided. In other words,
    resources are channelised for the
    production of only those goods which
    would give highest returns. Thus there is
    rational allocation and utilization of
    resources at the international level due
    to foreign trade.
    3. Equality of prices
    Prices can be stabilised by foreign trade.
    It helps to keep the demand and supply
    position stable, which in turn stabilises
    the prices, making allowances for
    transport and other marketing expenses.
    4. Availability of multiple choices
    Foreign trade helps in providing a better
    choice to the consumers. It helps in
    making available new varieties to
    consumers all over the world.
    5. Ensures quality and standard goods
    Foreign trade is highly competitive. To
    maintain and increase the demand for
    goods, the exporting countries have to
    keep up the quality of goods. Thus
    quality and standardised goods are
    6. Raises standard of living of the people
    Imports can facilitate standard of living
    of the people. This is because people can
    have a choice of new and better varieties
    of goods and services. By consuming
    new and better varieties of goods,
    people can improve their standard of
    7. Generate employment opportunities
    Foreign trade helps in generating
    employment opportunities, by increasing
    the mobility of labour and resources. It
    generates direct employment in import
    sector and indirect employment in other
    sector of the economy. Such as Industry,
    Service Sector (insurance, banking,
    transport, communication), etc.
    8. Facilitate economic development
    Imports facilitate economic development
    of a nation. This is because with the
    import of capital goods and technology,
    a country can generate growth in all
    sectors of the economy, i.e. agriculture,
    industry and service sector.
    9. Assitance during natural calamities
    During natural calamities such as
    earthquakes, floods, famines, etc., the
    affected countries face the problem of
    shortage of essential goods. Foreign
    trade enables a country to import food
    grains and medicines from other
    countries to help the affected people.
    10. Maintains balance of payment
    Every country has to maintain its balance
    of payment position. Since, every country
    has to import, which results in outflow
    of foreign exchange, it also deals in
    export for the inflow of foreign
    11. Brings reputation and helps earn
    A country which is involved in exports
    earns goodwill in the international
    market. For e.g. Japan has earned a lot of
    goodwill in foreign markets due to its
    exports of quality electronic goods.
    12. Promotes World Peace
    Foreign trade brings countries closer. It
    facilitates transfer of technology and
    other assistance from developed
    countries to developing countries. It
    brings different countries closer due to
    economic relations arising out of trade
    agreements. Thus, foreign trade creates
    a friendly atmosphere for avoiding wars
    and conflicts. It promotes world peace as
    such countries try to maintain friendly
    relations among themselves.
    Like 0    Dislike 0   4 months ago
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