1.

1 INTERNATIONAL TRADE AND TRANSPORT

a. DEFINITIONS, NATURE OF TRADE
 Definitions

Trade is a part of commerce and is confined to the act of buying and selling of goods. Trade
is classified into two categories, Internal and External (international trade) Trade. Internal
trade is when buying and selling of goods and services takes place within the geographical
boundaries of a country,

International trade: International trade is the exchange of goods and services between
countries. Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries, or more expensive or not available
domestically it also allows countries to expand their markets. Hence as a result of
international trade, the market is more competitive. This ultimately results in more
competitive pricing and brings a cheaper product home to the consumer.

A product that is sold to the global market is called an export, and a product that is bought
from the global market is an import. Imports and exports are accounted for in the current
account section in a country's balance of payments.

Global trade allows wealthy countries to use their resources for example, labour, technology,
or capital more efficiently. Different countries are endowed with different assets and natural
resources: land, labour, capital, and technology, etc. This allows some countries to produce
the same good more efficiently in other words, more quickly and at lower cost. Therefore,
they may sell it more cheaply than other countries. If a country cannot efficiently produce an
item, it can obtain it by trading with another country that can. This is known as specialization
in international trade.

Standard international trade models universally consider maximizing the availability of

inexpensive goods as the objective of international trade. They then go on to show that tariffs
and other impediments to trade cause a loss of economic efficiency.

Transport: Transport refers to a system or means of conveying people or goods from place
to place. Transport or transportation is the movement of humans, animals and goods from one
location to another. Modes of transport include air, land (rail and road), water, cable, pipeline
and space. The field can be divided into infrastructure, vehicles and operations. The primary
function of transportation is the transfer of messages and information. It is also needed for
rapid movement of troops in case of emergency and finally movement of persons and goods.
The political decision of construction and maintenance of roads has resulted in the
development of transportation system.

Transportation Service means a service using vehicles to transport people, currency,

documents and packages. This term refers to uses such as bus lines, transit services,
limousine services and courier services.

 Nature of international trade

International trade arises because countries differ in their demand for goods and their ability
to produce them. Factors of production cannot be transferred easily between countries, and so
goods move instead.

The Advantages of International Trade

International trade promotes specialization, and specialization increases productivity. Over

the long run, increased trade and higher productivity raise living standards for all nations.
Gradually, countries have realized that opening up their economies to the global trading
system is the most secure road to prosperity.

- Comparative Advantage: It allows countries to specialize in producing only those

goods and services, which it is good at.
- Economies Of Scale: If a country wants to sell its goods in the international
market, it will have to produce more than what is needed to meet the domestic
demand. So, producing higher volume leads to economies of scale, meaning the
cost of producing each item is reduced.
- Competition: Selling goods and services in the foreign market also boosts the
competition in that market. In a way, it is good for local suppliers and consumers
as well. Suppliers will have to ensure that their prices and quality is competitive
enough to meet the foreign competition
- Transfer Of Technology: International trade often leads to the transfer of
technology from a developed nation to the developing nation. Govt. in the
developing nation often lay terms for foreign companies that involve developing
local manufacturing capacities.
 - More Job Creation: Increase in international trade also creates job opportunities in
both countries. That‟s a major reason why big trading nations like the US, Japan
and South Korea have lower unemployment rates.

Disadvantages of International Trade

- Over-Dependence: Countries or companies involved in the foreign trade are

vulnerable to global events. An unfavourable event may impact the demand of the
product, and could even lead to job losses. For instance, the recent US-China trade
war is adversely affecting the Chinese export industry.
- Unfair To New Companies: New companies or start-ups who don‟t have much
resources and experience may find it difficult to compete against the big foreign
firms.
- A Threat to National Security: If a country is over dependant on the imports for
strategic industries, then exporters may force it to take a decision that may not be
in the national interest.
- Pressure on Natural Resources: A country only has limited natural resources. But,
if it opens its doors to the foreign companies, it could drain those natural resources
much quicker.

Gains from international trade

Gains from trade refers to various benefits which country derived out of international trade.
Such gains are due to International division of labour and specialisation .The important gains
that countries enjoy by participating in international trade . Gains from trade are the net
benefits to economic agents for being allowed and increase involuntary trading with each
other. In technical terms, they are the increase of consumer surplus Plus producer surplus
from lower tariffs or otherwise liberalizing trade.

Factors that Determine the Gains from trade

 Differences in cost ratios: if country A has comparative advantage in the production

of wheat and country B has comparative advantage in the production of cotton , both
countries will gain from trade. The size of the gain will depend on the cost of
production of each commodity in both countries.
 Reciprocal demand: The terms of trade, intern depend upon the reciprocal demand i.e
., the relative strength and elasticity of demand of one country for the product of the
other in exchange for its product.
 Level of income: The level of money income of a country is another factor which
determines the gains and the share of trade. A country whose goods have a constant
demand in other countries will have a high level of money income. if the demand for
its exports is high it exports Industries will expand consequently the level of money
wage will rise in these industries.
 Terms of trade: The most important factor which determines the gains from trade is
the terms of trade. The international terms of trade refer to the rate at which one
commodity of a country is exchange for another commodity of the other country.
 Productive efficiency An increase in the productive efficiency of a country also
determines its gains from trade. It lowers costs of production and prices of goods in
the home country. As a result, the other country gains by importing cheap goods and
its terms of trade improve.
 Nature of commodities exported: Another factor is the nature of commodities
exported by a country. A country which exports mainly primary products has
unfavourable terms of trade. Consequently, it gain from trade will be smaller. On the
country exporting manufactured goods has favourable terms of trade and its gain
from trade will be larger.
 Technological conditions: A country which is technologically advanced and has an
abundance of capital, its volume of foreign trade will be large and so will be its gain
from international trade. On the other hand, If a country is technologically backward
with abundant labour, its volume of foreign trade will be small and so will be its gain
from trade
 Gains from terms of trade
 Increase in world production
 Increases an employment
 Greater efficiency
 An enhancement of consumer welfare
 Increases in investment
 Necessary for economic development
 Resources are utilised in an optimum way.
Measuring gains from international trade

Economists have adopted various methods to measure the gains from international trade
which are explained as under:

1. The Classical Method:

Jacob Viner points out that the classical economists followed three different methods or
criteria for measuring the gains from international trade: (1) differences in comparative costs;
(2) increase in the level of national income; and (3) the terms of trade.

Ricardo‟s Approach

To take Ricardo‟s approach first, a country will export those commodities in which its
comparative production costs are less, and will import those commodities in which its
comparative production costs are high. “The country thus economises in the use of its
resources, obtaining for a given amount thereof a larger total income than if it attempted to
produce everything itself.”

Mill‟s Approach:

J.S. Mill analysed the gains as well as the distribution of the gains from international trade in
terms of his theory of reciprocal demand. According to Mill, it is reciprocal demand that
determines terms of trade which, in turn, determine the distribution of gains from trade of
each country. The term „terms of trade‟ refers to the barter terms of trade between the two
countries i.e., the ratio of the quantity of imports for a given quantity of exports of a country.
The distribution of gains from trade is explained in terms of the Marshall-Edge worth offer
curve.

2. The Modern Approach:

In modern trade theory, the gains from international trade are clearly differentiated between
the gain from exchange and the gain from specialisation. The analysis is explained in terms of
the general equilibrium of a closed economy by taking demand and supply. It is characterised
by the tangency of a community indifference curve with the transformation curve, and the
equality of the marginal rates of substitution between commodities in consumption and
production with the domestic terms of trade or commodity price ratio. “The introduction of
international trade permits the realisation of a gain from exchange and gain from
specialisation. When equilibrium is established and these gains are maximised, the new
marginal rate of transformation in production and the new marginal rate of substitution in
consumption are equal to the international price ratio or terms of trade.” Thus both producers
and consumers gain from international trade by producing and consuming more than the pre-
trade level.

1.2 ROLE PLAYED BY TRANSPORT AND THE TRANSPORT

INDUSTRY IN INTERNATIONAL TRADE

Logistics includes integration of packaging of goods, storage, transportation and handling

goods. Transport carries the people and goods from one place to another. It helps both the
production, distribution as well as consumption processes. A successful international trade
involves three most important sectors in which the transport industry is one of them. These
are: sales, insurance and transport. In international trade, distance is an issue that arises as
goods will have to be delivered to the customers. It is without a doubt that transport is an
indispensable part of international trade. Transport is a key element of economic growth and
competitiveness. However transport and the transport industry play the following roles in an
economy:

- It provides vital distribution for production, by facilitating in carrying raw

material to the place of production and distribution of finished products for
consumption.
- It helps in essential personal mobility,
- It directly interconnects businesses to worldwide markets.
- It enables trade, commerce, and communication that establish civilization
- It is a contributing factor in the economic growth and development of all the
nations
- Transportation offers numerous opportunities: An effective transport system offers
social, economic, political and cultural advantages like accessibility to markets,
infusion of investors, distribution of resources, etc that result in an indirect impact
on the growth and development of a country. It can be measured in terms of added
value and employment. There is an increase in employment opportunities and it
helps to boost the national income of a country. It also acts as a viable opportunity
for the consumer who can enjoy the usage of numerous goods and services that
were earlier not available at their local place
- Transportation helps in social development: As the problem of distance is no
longer an issue there has been more contact and mutual understanding between
individuals and business entities. It has also increased the standard of living
because the earning power of a person has increased.
- Transportation helps in industrial and agricultural development: It has been
possible to use good fertilizers, qualitative seeds, and numerous modern
equipment and techniques because they could be transported from one place to
another at reasonable costs.
- Transportation helps in political development: Transport also plays a major role in
maintaining the national defence of a nation. During war or emergency situations
it is an effective transport system that can move quickly between sensitive areas
and transport defence personnel, equipment, materials, food items, and other
necessities.
- Transportation helps in bringing people closer during natural calamities: Floods,
drought, earthquake, and famine are natural disasters that are unpredictable by
nature. The worst thing about such disasters is that they leave behind immense
destruction that is immeasurable. Loss of lives, resources, and infrastructure are
common after-effects that people have to deal with
- Transportation helps in cultural development: The importance of transportation is
that it has facilitated a better understanding between people as they are no longer
divided by specific boundaries of a place
- Transportation helps in the growth of business organizations: It is the medium that
physically connects a business entity to its customers as well as suppliers.