DEVELOPMENT

STUDIES
[21] MODULE 8: INTERNATIONAL
TRADE

MATER SPEI COLLEGE

TOPIC GENERAL OBJECTIVES SPECIFIC OBJECTIVES
Learners should be able to: Learners should be able to:  Imports are goods or services a country buys from other countries
International Trade Develop an understanding and -explain international trade;
appreciation of the dynamics of -account for international trade;  Exports are goods or services a country sells to other countries
international trade. - describe global trade patterns
(a) developed countries, (b)
developing countries and (c)  Inflows are sums of money or money that comes into the country, for
example, payments of exports and foreign aid.
between developed and
developing countries ;  Outflows are sums of money or money that leaves the country, for
-discuss free trade and example, payments of imports and tourists expenditure out of the country.
protectionism.
-discuss the challenges of
international trade.  Invisible trade is the buying or selling of services which are intangible
and unseen, for example, tourism and education

 Visible is the buying or selling of tangible goods or goods that can be

INTERNATIONAL TRADE seen/touched.

International trade is the exchange of goods and services between countries. THE IMPORTANCE OF INTERNATIONAL TRADE (REASONS
FOR TRADE OR EXCHANGE)
International trade involves the physical movement of goods and services from
one country to another.
1. A country can get goods and services that it is unable to produce.
THE ASPECTS OF INTERNATIONAL TRADE
This means that a country gets access to goods and services it has
limitations of acquiring by its own human and physical resources.
2. This creates good international relationship between countries.
3. It helps developing countries to gain access to international
markets for their primary products like cocoa, rubber, coffee,
cotton, diamonds, gold, oil etc.
4. It creates employment in industries where goods are produced,
since more people will be employed in order to produce more.
5. It generates income for countries involved in trade.
6. It is a source of foreign exchange which is used by countries to
import goods from other countries and to finance development
projects like the building of roads, schools, hospitals within the
countries.

Fig.1

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE

 7. There is international specialisation which speeds up production THE PATTERNS OF GLOBAL/ INTERNATIONAL TRADE
thus leading to mass production which is bound to lead to lower
prices. International trade takes place at different levels and various patterns have
Countries concentrate their efforts in the production of particular emerged.
commodities therefore countries and individuals can develop
expertise in specific areas, train workers and find new methods of (a)Trade between developed countries
production.
8. It provides countries with a wider variety of goods from which to The generally these countries trade products that both of them manufacture
choose to meet their basic needs and wants. but which one of the countries produces at a lower price or higher quality.
9. It enables goods to be obtained at different seasons, as various
parts of the world experience different climatic conditions at
different times of the year. (b)Trade between developing countries
10. It helps some countries to get rid of surplus by exporting it, for
example, if a country produces more than it can consume it then The main trade between developing countries is food.
export.
11. A country may acquire technology and skills through international The amount of trade between developing countries is generally much lower
trade. than trade between developing and developed countries.
12. It enables developing countries to get technical assistance and
knowledge from developed countries. There is less trade because developing countries usually produce the same
kind of raw materials as one another.
THE DISADVANTAGES/ LIMITATIONS OF INTERNATIONAL
TRADE Since they do not export many manufactured goods they have very little to
trade with one another.
1. It benefits the richer countries than the poor.
2. It often makes it difficult for poorer countries to change their (c)Trade between developed and developing nations
pattern of trade, for example, they are constant consumers of cheap
raw materials and buyers of expensive finished goods. The developed world largely exports manufactured products whereas the
3. It may also lead to over production of goods which might lead to developing world largely exports raw materials, resulting in the dominance
economic depression. of the world trade by developed nations.
4. It leads to interdependence therefore in times of war, when supply
sources of essential goods halt or stop, the standard of living will
be low.
5. It brings competition, international jealousy and mistrust.

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE

 TRADE POLICIES THE DISADVANTAGES OF FREE TRADE

(a) FREE TRADE  Free trade may increase world production but this often helps some
countries than others, that is those with a lot of resources will
Free trade is the principle or practice of exchange of goods and services benefit more.
between countries in which controls or restrictions to trade have been  Easy access to resources will lead to exploitation of more
removed. resources.
 Greater mobility of labour from area to area will leave other
Free trade is a system whereby firms and people may trade anywhere countries with few skilled human resources.
worldwide without being charged custom duties.
(b) TRADE PROTECTIONISM
THE CHARACTERISTICS OF FREE TRADE
 Prices are determined by supply and demand. Trade protectionism is also known as restricted trade
 Trade may occur anywhere in the world without restrictions. It is a principle or practice of taking care of a country’s own industry by
 The economy has to be privatized. subsidizing them or imposing barriers against imports.
 There is free competition.
Protectionism is a system whereby trade policies are imposed to safeguard
THE ADVANTAGES OF FREE TRADE local industries from foreign competition by raising import duties or tariffs.
 World production is increased because countries are enabled to use This is the opposite of free trade.
their resources in the best possible way. The policies also restrict the free flow of goods and services across
 Each country can enjoy a wider variety of goods and services international borders.
leading to higher standards of living.
 It promotes international competition which helps in keeping
prices down.

 Nations allow exports and imports free of custom duties (tax).

 The world is like one big market with prices determined by supply
and demand.

 Investment in resources can take place anywhere unrestricted.

 People buy where they find the best deal.

Fig.1

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE

 TYPES OF PROTECTION This leads to discrimination in favour of home products.

 TARRIFS (Import duty)  POLITICAL BOUNDARIES

The boundaries generally regulate the easy flow of goods and
These are taxes put on imports to increase their prices so that services into a country. Traders cross at certain points in order to
imports are more expensive to buy. declare their goods at the border
This is done to discourage buyers from buying foreign goods and
at the same time protect local industries by promoting their THE ADVANTAGES OF TRADE PROTECTIONISM
products.
1. It protects infant industries or new industries from competition.
 QUOTAS
2. Local industries are protected from competing with foreign goods
This is a measure that limits the quantity of imports that can be or industries.
brought into a country by importers’ every year.
This would limit the consumers’ choice of goods hence forcing 3. It boosts the number of exports.
them to buy locally produced goods and services.
4. Countries charge tariffs or quotas to limit imports and at the same
 EXCHANGE CONTROLS time raise revenue.

International trade involves foreign currency exchange as exports 5. Government encourage exports by giving subsidies, Export-
are paid in the local currency. Oriented Strategy.
This means there is a certain foreign currency in the country that
flows due to payments of exports. 6. Investment in other countries may be restricted or banned.
The government therefore limits the amount needed to pay for 7. It keeps incomes and employment high. The more goods and
exports. services a country produces the higher the incomes and
In the process free-flow of goods and services is reduced. employment level.

 ECONOMIC NATIONALISM/ QUARANTINE SYSTEM 8. It makes a country to be self-reliant; enables a country to provide
for its basic needs.
The government can decide to use health and safety regulations to
limit the type and quantity of imports. 9. It prevents dumping of foreign goods which are usually of low
For example, the government refuse to allow cattle from quality but at the same time their prices are below the local goods.
Zimbabwe into Botswana because of the Foot and Mouth disease
that is prevalent there. 10. It corrects an unfavourable balance of payment as strict exchange
controls and high tariffs reduce imports.

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE

 11. It also helps reduce imported inflation. That if there is rise of Exports -P5 billion
goods in a country and another country buy such goods they have Imports-P4 billion
imported that inflation or increase of prices.
The surplus is P 1 billion
THE DISADVANTAGES OF TRADE PROTECTIONISM
Positive balance of trade is also called trade surplus.
1. Lack of competition may lead to expensive products in the home
market. It is favourable because it means that the country is building up a surplus of
foreign currency that it can use in the future.
2. Sometimes local industries develop slowly because there is no
foreign competition. (b)Negative Balance of trade is when the country is spending more on its
imports than it earns for its exports.
This leads to waste of economic resources because money has been
invested into these industries in order to achieve economic Negative balance of trade is also known as trade deficit.
development.
Government try to avoid going into a negative balance of trade by
3. Protectionism narrows the market since trade with other countries restricting imports and encouraging exports.
becomes difficult due to restrictions imposed as trade is only with
those countries with few restrictions.

BALANCE OF TRADE

The balance of trade refers to the difference between the amount of money
leaving a country to pay for imports and the amount of money coming into
the country from other countries to pay for exports in a year.

It is calculated by subtracting imports from exports to see if there is a trade

surplus (a positive balance) or a trade deficit ( a negative balance).
Fig.3
(a)Positive or Favourable balance of trade is when a country exports more
goods than importing them in money terms.

For example:

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE

 SOLUTIONS TO NEGATIVE BALANCE OF TRADE TERMS OF TRADE

How can the government solve the problem of deficit? Terms of trade refers to the rate at which exports buy imports.

1. Try by every possible means to increase exports through: If the terms of trade decline or fall the terms of trade is unfavourable but if
 Building more factories. they rise they are favourable.
 Encouraging farmers to grow export crops.
 Search for new sources of minerals. In developing countries the terms of trade have declined simply because
 Limit imports. they export primary products which are less profitable than manufactured
goods.
2. The government may also devalue the currency, for example, reduce the
value of the local currency so that exports become cheaper for other BALANCE OF PAYMENT
countries to buy. This will also make imports more expensive and people
will reduce buying from outside so much. Balance of trade is an account or financial records of all transactions of a
country and the rest of the world per annum.
3. The government can also adopt the Export Oriented and Import
Substitution Industrialisation strategies. Balance of payment is made up of the following:

4. The other solution is to borrow money from international organisation (a)Balance of payment on current account – The current account shows
and from private banks, for example, World Bank, IMF etc. but this the present income and expenditure of a country with the rest of the world.
solution should be treated as a temporary measure as it simply postpones
the problem. (b)Balance of payment on capital account- Capital movements that may
be made by private individuals or firms or government agencies also effect
*Devaluation of currency is the most common solution especially in the balance of payment.
developing countries as this helps a country to sell more exports and buy There are four reasons for capital movement from one country to another:
fewer imports.  For investment abroad
Devaluation is often the hardest on the poorest people in the country who  As loans
suddenly find their wages can no longer buy very much for them.  For safety
 As a gift from one country to another.
If a country spends more on buying imports than it earns form selling
exports then it has a negative balance of trade and this can lead a country (c)Balance of payment on the monetary movement account: This part of
into debts with serious consequences. balance of payments tells us how the balance on both current account and
capital account taken together is settled.
Most developing countries experience a negative balance of trade and
therefore have to borrow money from the World Bank to pay for imports.

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE

A deficit on combined currency and capital account can be paid in
several ways: 5. Political instability
 By selling foreign investment
 By exporting minerals
 By receiving a gift from another country.

Deflationary policy – This can involve the following:

 Reducing bank lending
 Raising interest rates
 Increasing taxes
 Cutting government expenditure.

The aim of this method is to cut down domestic demand and reduce
imports. When demand is low, prices tend to go down and exports are more
attractive to foreign buyers.

THE CHALLENGES OF INTERNATIONAL TRADE

1. Economic conditions in developing countries

2. Access to world trade- Although world trade has increased

dramatically, the share of poor countries remains 5% in global
trade.

The majority of people in developing countries are poor and

developing countries have the majority of people in the world.

3. The legacy of neo-colonialism- Whereas some countries have freed

or liberated themselves from neo-economic bondage through
industrialisation, the rest of the developing countries is still
dependent on the developed countries.

4. Globalisation

Mater Spei College Development Studies Notes MODULE 8: INTERNATIONAL TRADE