Meaning and Scope of Foreign Trade

Meaning and Scope of Foreign Trade


Trade between two or more nations is called foreign trade or international trade. This involves the exchange of goods and services between the citizens of two nations. when the citizens of one nation exchange goods and services with the citizens of another nation, it is called foreign trade; for example, India’s trade with USA, Japan, France and Pakistan.

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Foreign trade is also known as external trade.


Foreign trade transactions are classified under three categories:

  • Import Trade
  • Export Trade
  • Entrepot Trade.

Scope of Foreign Trade

The aim of foreign trade is to increase production and to raise the standard of living of the people. Foreign trade helps citizens of one nation to consume and enjoy the possession of goods produced in some other nation. There is a need of foreign trade due to the following reasons:

I. Uneven Distribution of Natural Resources:

Natural resources of the world are not evenly divided amongst the nations of the world. Different countries of the world have different amount of natural resources and they differ with each other in regard to climate, minerals and other factors. Some countries can produce more of sugar like Cuba, some can produce more of cotton like Egypt, while there are some others which can produce more of wheat like Argentina. But all these countries need sugar, cotton and wheat. So they have to depend upon one another for the exchange of their surpluses with the goods are in short in their country and hence the need for foreign trade is natural.


II. Division of Labour and Specialization:

Due to uneven distribution of natural resources, some countries are more suitable placed to produce some goods more economically than other countries. But they are geographically at a disadvantageous position to produce other goods. They specialize in the production of such goods in which they have some natural advantage in the form of availability of raw material, labour, technical know-how, climatic conditions, etc., and get other goods in exchange for these goods from other countries.

III. Differences in Economic Growth Rate:

There are many differences in the economic growth rates of different countries. Some countries are developed, some are developing, while there are some other countries which are under-developed; these under- developed and developing countries have to depend upon developed ones for financial help, which ultimately encourages foreign trade.


IV. Theory of Comparative Cost:

According to the theory of comparative cost each country should concentrate on the production of those goods for which it is best suited, taking into account its natural resources, climate, labour supply, technical know-how and the level of development. Each country specializes in the production of those goods which it can produce at the lowest cost as compared to other countries which leads to international specialization and division of labour. This reduces the cost of production all over the world and improves the standard of living of the people in various countries. Hence the theory of comparative cost encourages foreign trade.

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