What are the advantages and disadvantages of foreign trade?

The advantages and disadvantages of foreign trade.

The trade between two or more nations is termed as foreign trade or international trade. It involves exchange of goods and services between the trades of two countries. Foreign trade consists of import trade, export trade and entrepot trade. In the early stages of human civilization, production was confined as per consumption. Human wants were limited. Now-a-days, human wants are increasing and as such no man was considered to be self-dependent. Like this no country can live in isolation and claimed the status to be self-sufficient. Because of this reason countries have trade relationships with each other. The primary objective of foreign trade is to increase foreign trade and increase the standard of living of its people. There is an increasing demand for foreign trade because of the following reasons:

  • The natural resources are unevenly distributed.
  • The presence of specialization and division of labour.
  • Different countries have difference in economic growth rate.
  • The presence of the theory of comparative cost.

The following are some of the advantages of foreign trade:

Optimum use of Resources: Foreign trade helps in the optimum use of natural resources and avoid wastages of resources.

Stable Price: It ensures the presence of stable price by avoiding wide fluctuations in prices. It tries to equalise the world price.

Availability of all types of goods: It enables a country to import those goods which it cannot produce.

Increased Standard of living: It ensures more production to meet the demand of the people of different countries. By increased production, it becomes possible to increase income and the standard of living of its people. It also increase the standard of living by increasing more employment opportunities.

Large Scale production: It ensures large production because the production is carried on to meet the demand of its people as well as world market. Large scale production also ensures a great deal of internal economies which reduces the cost of production.

Foreign trade is not free from difficulties. The following are some of the important difficulties of foreign trade:

I. It is a long distance trade and as such it becomes difficult to maintain close relationship between the buyer and the seller.

II. Each country has its own language. As foreign trade involves trade between two or more countries, there is diversity of languages. This difference in language creates problem in foreign trade.

III. Foreign trade involves preparation of a number of documents which also creates difficulties in the way of foreign trade.

IV. Some restrictions are imposed on export and import of commodities. These restrictions stands on the progress of foreign trade.

V. Foreign trade involves a great deal of risks because trade takes place over a long distance. Though the risks are covered through insurance, it involves extra cost of production becuase insurance cost is added to cost.