What is Foreign Trade ? Types and Importance of Foreign
What is the foreign trade? Foreign trade is the exchange of goods, capital, and services. In most states, it represents a share of gross domestic product. Although foreign trade has been around for some time, its social, economic, and political importance has been on the rise in the recent centuries. Ideally, all countries need goods and services to satisfy the wants of their people and no country can produce all the goods that it needs this means it has to buy what it needs from other countries that produce those goods. On the same not, it sells to those countries what it has on surplus.
What moves foreign trade
Foreign trade can be moved by almost anything. In most instances, foreign trade is a good guide to a country’s fortunes. This means that most factors affecting the economy also affect foreign trade. Since some factors are more important than others, they should be a priority. One of the factors that impact on foreign trade is the money supply controlled by the central banks. Normally, an increase in the money supply often leads to a fall the value of currency. This is the norm of demand and supply. More so, increasing interest rates often increase the supply of money.
Types of foreign trade
Foreign trade can be divided into 3 major groups namely entrepot, import trade, and export trade. Entrepot trade means importing goods from one country with the sole purpose of exporting them. Export trade is the sale of goods from one country to another while import trade means buying of goods by one country from another. Depending on a country’s needs, it will choose the type of foreign trade that it wants to engage in. This is often dictated by what it has in surplus or rather what it lacks.
The need of foreign trade
· Optimum utilization of resources- Because of specialization, wastage of resources and unproductive lines can be avoided. This means through foreign trade resources are channeled to the production of goods that yields highest returns. This leads to rational utilization and allocation of resources.
· Division of labor- At the world level, foreign trade leads to specialization and division of labor. Normally, some countries have a lot of resources while others lack resources. Through foreign trade, they export raw materials to countries that have skilled manpower to finish the production of these goods.
· Availability of multiple choices- As a consumer, you are given a variety of choices through foreign trade. For instances, it makes a variety of goods and services available for them so that they can be able to choose what they prefer.
· Equality of prices- Typically, prices can also be made stable through foreign trade. This is done through keeping the demand and supply in a stable position which thereby stabilizes tee prices of goods and services.
Role of commercial banks in foreign trade
Commercial banks often provide the instruments and financial structures needed to carry out the foreign trade. They ensure that there is transparency and safety in the flow of money and documents. For instance, if you are buying goods from abroad, the seller will want to be sure of the payment and you will also want to be sure that all the terms and conditions will be met. This is why commercial banks issue a letter of credit in favor of the seller. In other words, commercial banks facilitate the payment of money once during the trading process.
