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12 Reasons why Foreign Trade is necessary for the growth of an Economy

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Foreign Trade

Foreign trade is nothing but trade between the different countries of the world. It is also called as International trade, External trade or Inter-Regional trade. It consists of imports, exports and entrepot.

Types of Foreign Trade

  • Import – The inflow of goods in a country is called import trade
  • Export – The outflow of goods from a country is called export trade
  • Entrepot – Many times goods are imported for the purpose of re-export after some processing operations. This is called entrepot trade.

Foreign trade basically takes place for mutual satisfaction of wants and utilities of resources.

Read on GWI Decoding Foreign Investment inflows into India – Domestic Black Money in a “Foreign” Cloak.

Importance of Foreign Trade

Following points explain the need and importance of foreign trade to a nation:

  1. Division of labor and specialization – Foreign trade leads to division of labor and specialization at the world level. Some countries have abundant natural resources thus they should export raw materials and import finished goods from countries which are advanced in skilled manpower. Thus foreign trade gives benefits to all the countries and thereby leading to division of labor and specialization.
  2. Optimum allocation and utilization of resources – Due to specialization, unproductive lines can be eliminated and wastage of resources can be minimized or avoided. In other words, resources are channelized for the production of only those goods which would give highest returns. Thus there is rational allocation and utilization of resources at the international level due to foreign trade.
  3. Equality of prices – Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilizes the prices.
  4. Availability of multiple choices – Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world, thus giving the consumers a wide variety of options to choose from.
  5. Ensures quality and standard goods – Foreign trade is highly competitive in order to maintain and increase the demand for goods, the exporting countries have to keep up the quality of goods. Thus foreign trade ensures that the quality and standardized goods are produced
  6. Raises Standard of Living of the people – Imports can facilitate standard of living of the people. This is because people can have a choice of new and better varieties of goods and services. By consuming new and better varieties of goods, people can improve their standard of living.
  7. Generate employment opportunities – Foreign trade helps in generating employment opportunities, by increasing the mobility of labor and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. Such as Industry, Service Sector (insurance, banking, transport, communication), etc.
  8. Facilitate economic development – Imports facilitate economic development of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector.
  9. Assistance during natural calamities – During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods. Foreign trade enables a country to import food grains and medicines from other countries to help the affected people.
  10. Maintains balance of payment position – Every country has to maintain its balance of payment position. Since every country has to import which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.
  11. Brings reputation and helps earn goodwill – A country which is involved in exports earns goodwill in the international market. For e.g. Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic goods.
  12. Promotes World Peace – Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer due to economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves.

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Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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