Foreign trade includes the interaction of any country with other countries in terms of the movement of goods and services across national borders.
Foreign trade makes it possible for a country to:
- Generate additional income from the sale of national goods and services abroad
- Saturate the domestic market
- Overcoming the scarcity of national resources
- Increase productivity by specializing in global trade to supply certain products on the world market
Foreign trade is characterized by the concepts of export and import : the first consists of exporting goods and services abroad to receive foreign currency in exchange, and the second consists of importing them from abroad with the corresponding payment. Exports, like investments, increase the aggregate demand of a country and act as a multiplier of foreign trade, creating primary, secondary, tertiary employment, etc. The increase in imports, on the other hand, limits this effect due to the outflow of financial resources abroad.
Foreign trade is organized according to the principles developed and enshrined in the General Agreement on Trade and Tariffs (GATT). This has been replaced by the World Trade Organization (WTO), which takes a broader view of foreign trade, including the exchange of goods and services, as well as the buying and selling of intellectual property.
FOREIGN TRADE THEORIES
The Absolute Advantage Theory
Exports in foreign trade , according to A. Smith, are profitable if production costs in the country are significantly lower than elsewhere. Thus, goods produced by the domestic economy have an absolute advantage over foreign competitors and can be easily sold abroad. On the other hand, no country can have an absolute advantage in all the goods produced, so you have to import those that are more expensive at home and cheaper abroad. In this way, a direct benefit is obtained from exports and imports at the same time.
The Theory of Comparative Advantage
Based on the absolute advantage of A. Smith and Ricardo, they formulated the theory of comparative costs (advantages), according to which, when determining the profitability of foreign trade, one must compare not the absolute effect but the relative, and not the costs themselves, but their proportions. Thus, it must be taken into account that, by producing some goods in conditions of limited resources, the country is deprived of an opportunity to manufacture others, no less necessary for it, for which reason, according to Ricardo’s theory of comparative advantages, it is very possible a situation in which it is favorable for the country to import the goods, even if their manufacture within the country costs less. In this case, the absolute cost theory of A. Smith becomes a special case of the comparative cost theory of D.
The Heckscher–Ohlin theory
Ricardo’s theory is complemented by the Heckscher-Ohlin theory, named after two Swedish economists who showed that countries tend to export not only those goods that offer absolute and relative advantages, but also those whose production makes intensive use of resources. relatively excessive factors of production, while importing those goods for which the country has factor shortages. In contrast to A. Smith and Ricardo, his modern followers believe that both parties benefit from foreign trade : the country and the rest of the world.
Foreign trade is the commercial exchanges of a country with other territories, which include both imports and exports. The set of foreign trade relations between different countries constitutes international trade. Within this trade, an international division of labor has developed over time that underlies international trade relations. Foreign trade dates back to the days of subsistence production, and it developed rapidly in the pre-capitalist era, taking new forms with the advent of capitalist relations.