Chapter # 8: International Trade
45. Give the concept of Balance of Trade and Balance of Payment in
International Trade
If anyone among buyer and seller is from another nation, then it is called international trade. In
other words, international trade is the trade and transaction of a nation with another nation or rest
of the world. It is integral part of present economy. There are following two activities in international
trade:
1. Import: It is purchase of goods and services from another nation
2. Export: It is sale of goods and services to another nation.
There are following two components in international trade:
A. Balance of Trade
B. Balance of Payment
Balance of Trade:
It is the difference between total export and total import of physical materials form customs of a
nation with rest of the world. It has following features:
➢ Balance of trade has two elements: Import and Export
➢ It includes only visible goods
➢ Non-material or invisible goods are not included.
Types of Balance of Trade:
1. Trade Surplus: If total export of a nation is greater than total import then it is the case of
trade surplus
2. Trade Deficit: If total import of the nation is greater than total export of the nation then it is
called trade deficit.
3. Trade Balance: If total import of the nation is equal to total export of that nation then it is
called trade balance.
Balance of Payment
It is systematic record of receipt and payment of a country with rest of the world. It includes both
physical and non-physical goods. It has following features:
➢ Systematic record of the all the economic transaction.
➢ Both visible and invisible transactions are included.
➢ It is annual statement.
➢ Adopts double book keeping system.
➢ Same as accounting, total credit is equal to total debit.
Types of Balance of Payment:
1. Favorable balance of payment: If the total receipt is greater than total payment then it is
called favorable balance of payment
2. Unfavorable balance of payment: If total payment is greater than total receipt then it is
called unfavorable balance of payment.
Structure/Components of Balance of Payments
➢ Current account: Export and import of goods and services, expenses on travels,
transportation and communication, premium payment and receipt on insurance,
educational expenses,
➢ Capital Account: Record of exchange of financial account, borrowing and lending of capital,
purchase and sale of foreign securities etc.
➢ Cash account: Record of foreign exchange.
Importance of Balance of Payment
➢ Reflection of performance of economy.
➢ Evaluation of success of country.
➢ Express the stock of foreign currency.
➢ Shows expenses of import and export of goods.
➢ Helps to formulate economic policies.
➢ Shows the entire picture of toral trade and transaction of economy.
46. How trade deficit of Nepal can be reduced?
Balance of trade is an important indicator to measure transaction effectiveness of economy of the
nation. Deficit balance of trade shows weak performance of overall economic policy in the nation.
In country like Nepal, following activities can be done to correct trade deficit:
1. Rapid industrialization
2. Production of quality goods.
3. Diversification in trade
4. Reduction in cost of production
5. Formulation of proper trade policy
6. Publicity of trade of nation
7. Increase in production
8. Development of agriculture and hydro electricity
9. Development of infrastructure.
10. Correction of unproductive trade policies of Nepal.
47. Give arguments in favor and against of international trade/ Free trade
Free trade advocates trade without barriers within different nations. It is fundamentals for
international trade. Both of them have parallel relation therefore, advantages and disadvantages or
arguments in favor and against of both of them are similar. So, they can be explained as follows:
A. Arguments in Favor of International/Free Trade.
1. Benefit of specialization
2. Benmifits of international consumer
3. Promotes healthy competition
4. Expansion of market
5. Gain of technology
6. Gain of capital
7. Increase in production
8. Cheaper price
B. Arguments against international /Free trade
1. Exhaustion of natural resources
2. Economic dependency
3. Harms infant industries
4. Dumping
5. Economic crisis
6. Reduction in saving and investment
7. Import of harmful goods.
8. Bad impact in custom and tradition.
48. Give arguments for and against Protectionism
Note: Since free trade and protectionism are opposite of each other, all arguments for free trade
can be written as arguments against protectionism and vice -versa.
49. Critically explain Comparative Advantages Theory of International
Trade.
It is also called Ricardian Theory of international trade because it was propounded by David Ricardo
in 1817. This theory is based on the difference between cost of production of particular product in
domestic and foreign nations.
Cost of production of any goods may differ from country to country because of geographical
situation, climate, availability of resources, distance from market, size of population or labor force
in the nation, wage rate etc. Each country is specialized to produce such type of goods in which
comparative cost of production is least. As per this theory, any country should produce such goods
only which has cooperatively least cost of production in comparison with other countries and
should import the goods from other countries which cost of production is less in those countries.
Assumptions of Comparative Advantage Theory of International Trade
➢ Assumption of two countries
➢ Assumption of free trade
➢ Technology remains constant.
➢ Both countries should produce and consume similar goods .
➢ Labor is regarded as the only source of production
➢ Goods are produced under constant return to scale
➢ Absence of transportation cost.
➢ Perfect competition is assumed
➢ Perfect mobility of resources inside country but perfectly immobile between other nations
➢ Production cost is measured in terms of labor.
Criticism of Comparative Advantages Theory of International Trade:
➢ Unrealistic assumption of two countries only
➢ There is variety in teste.
➢ Labor is not only the factor of production
➢ Immobility of factors between different country is unrealistic in present world
➢ Constant return can not be achieved.
➢ Technology is everchanging
➢ Applicable only in free trade
➢ Complete specialization is not possible.