International Trade Aspects

INTERNATIONAL TRADE

International trade is the exchange of goods and services between countries. It is made up of imports, exports and income flows.

Differences between Domestic and International Trade

International trade is different from domestic trade for the following reasons:

• It involves the use of different currencies^[a][b]
• Customs formalities are involved
• It is trade across national borders
• Different languages may be involved
• It may require different quality and safety standards for a good

Basis for International Trade

International trade is essential for the prosperity of trading nations because:

1. Every country lacks some vital resources that it can get only by trading with others.
2. Each country’s climate, labour force, and other endowments make it a relatively efficient producer of some goods and an inefficient producer of other goods.
3. Specialisation permits larger outputs and can therefore offer economies of large-scale production.

Balance of Payments

This account is a record of all financial dealings over a period of time between one country and all other countries. It shows all the payments and receipts in respect of goods and services bought and sold between that and all other countries.

The balance of payments has two main components:

• The Current Account
• Capital and Financial Account

The Current Account

This has two components:

1. Visible Trade Balance: Visible trade is trade in goods from raw materials to semi-manufactured goods. Visible exports are goods, which are sold to foreigners. These result in inflows of money into the exporting country. Visible imports are goods, which are bought by residents from foreigners. Imports bring about outflows of foreign currency. The difference between visible exports and visible imports is known as the Balance of Trade or visible trade balance. The balance of trade can be favourable or unfavourable. It is favourable if inflows from exports in respect of visible goods exceed those arising in respect of the importation of same. It is unfavourable if the outflows from imports exceed inflows from imports.
2. Invisible Trade Balance: Invisible trade is trade in services. These services such as banking, insurance, transportation and tourism. The difference between inflows from invisible exports and outflows from invisible imports is known as the balance of services or invisible balance. This balance can also be favourable or unfavourable.
3. Current Transfers and Net Income Flows

Net income flows records inflows and outflows of payments for the use of factors of production. It is made up of wages, interest, profit and dividends paid to foreign workers resident in the UK and foreign investors in the UK. It also recognizes as inflows, wages paid to UK workers resident overseas and interest, profit and dividend earned by UK residents and firms on investments made in other countries.

The Balance of Current Transfers records one way unilateral movements of funds into and out of the UK.