External Trade/ Foreign Trade

External Trade/ Foreign Trade

This is the exchange of goods between two or more countries. OR: It is the trade between countries which involves a physical transfer of goods from one country to another.

Terms used in international trade:

  • Export trade. This is the selling of the country‟s goods to other countries e.g. Uganda mostly exports agricultural products such as cotton, coffee etc.        
  • Import trade: This is buying of goods and services from other countries.
  • Bilateral trade: This is the exchange of goods and services between two countries.
  • Multilateral trade: This is the exchange of goods and services among different countries/ among more than two countries.
  • Visible Trade: This is the exchange of goods between or among different countries. i.e. physical goods that can be seen and felt. 
  • Invisible trade: This is the exchange of services between or among different countries e.g. insurance, banking etc  
  • Entreport trade: This is the type of trade where goods are imported by a country for the purpose of re-exporting them to another country. i.e. This is the type of trade where goods are imported by a country for the purpose of re-exporting them to another country. i.e. where a country exports commodities it had previously 
  • Visible imports. This is buying of tangible goods from other countries 
  • Invisible Imports. This is buying of services/ intangible goods from other countries. examples of invisible imports includes tourism, education, banking etc.
  • Visible exports. This is selling of tangible goods to other countries. Examples of visible exports include coffee, cotton, fish etc    
  • Invisible exports. This is selling of services/ intangible goods to other countries.   

Factors that give rise to international trade /origin/basis/causes of international trade:

International trade arises because there is no country that is capable of providing all the resources it requires to develop its full economic potential and satisfy the demands of its economy.

The factors that give rise to international trade include:

Differences in natural resource endowments/ Differences in climatic conditions.Countries are endowed with different natural resources like minerals, oil, etc, thus countries produce different types of goods and in different quantities which necessitate exchange leading to international trade.

Differences in skills (natural and acquired) .People have different skills tha t lead to production of different goods and services and therefore the need for exchange leading to international trade.

Differences in level of technology.  There are wide gaps in technology between the developed and the less developed countries and thus production of different goods and services to be exchanged, this necessitates countries to participate in international trade.

Differences in tastes or demand.  Development in the country increases people‟s standards of living and hence may demand high quality products and a wider variety of them that are not produced at home but produced abroad, hence the need to participate in international trade.

The basis of international trade

The basis for international trade is explained by the two theories/principles.

  • The principle of absolute advantage
  • The law of comparative advantage  

The basis for international trade is explained by the two theories/principles.

  • The principle of absolute advantage
  • The law of comparative advantage  

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