International trade is the exchange that takes place between one country and another. It involves movement of goods, capital and services across the borders and contributes immensely to a country's gross domestic product. It is through International trade that countries have been able to consume a variety of commodities and services that are not produced within their territories in exchange for goods and services that are cheaply produced or are in abundant within a country's territory.
Various factors such as globalization and industrialization have had a significant impact on International trade whereby as countries open up their borders for global trade, this has subsequently allowed trade relations between nations as the quest for industrialization continues. The less industrialized nations have partnered with the industrialized nations whereby the much needed raw materials have been sourced from different countries allowing for trade and opening up of more opportunities.
Different countries are endowed with different amounts of natural resources and the factors of production. The factors of production are highly mobile within the borders restricting International Trade to the exchange between goods and services with little amount of labour and capital being exchanged between the nations. Counties do not prefer to import the factors of production owing to the existing restrictions; a much easier way has been through the importation of goods which act as substitutes to the importation of labor or the other factors of production.
When the factors of production are factored in the production of goods and services the costs differ from one country to another, it is therefore efficient and less costly to produce goods and provide certain services in certain countries than the others hence the need to engage in International Trade. Countries in respect to that aspect have specialized in the production of goods and in the provision of services that they can effectively and efficiently produce to satisfy the domestic markets and exchange the surplus for the goods and services that they cannot produce economically. Production of certain goods are either labor intensive or capital intensive which certain countries are not endowed with while others require the availability of the natural resources. The inequalities in the distribution of these factors have contributed to International trade otherwise countries would have been limited to the consumption of goods and services produced within their borders.
International Trade has various advantages and numerous limitations to the nations; some of the advantages include creation of opportunities; whereas more jobs are created when goods and services produced domestically can be sold to other nations creating opportunities for the citizens to make a living and gain a global market share. Through International Trade, borders have opened up attracting foreign direct investments which have contributed to the widespread globalization that we witness today among the nations. It also enables the countries to specialize and concentrate in the production of goods and services that they consider economically viable and exchange with what they cannot produce due to the economic disadvantage or any other factor thereby increasing competitiveness both domestically and internationally. More importantly it contributes to the country's Gross Domestic Product (Economy Watch, 2010).
International Trade however has few limitations. Due to the concentration in the production of cheap goods as a result of the economic advantage that a country posses against the other, it erodes the infant industries the chance to grow and become equally competitive in the global market. It further leads to the depletion of the natural resources since the country may over exploit its resources in attempt to satisfy the international market which may disadvantage the countries in future should the resources be fully exhausted. There are difficulties and differences in the languages and culture which poise as a barrier to the progress of international trade. There are also restrictions in the importation and exportation of certain commodities which also hinder International trade. Also among the limitations are the risks involved in international trade involving the goods being spoiled or hijacked along the way before they reach the intended buyers which add additional cost in terms of insurance cover for the consignments. These have reduced trade relationships among the countries to a greater extent (Aatisk Palekar, 2012).
While producing goods and services, the countries have to check their productions in terms of having an absolute advantage or a comparative advantage. In differentiating these terms, absolute advantage is the ability of a country or an entity to produce goods or services at a lower cost per unit than any other country or entity, while comparative advantage on the other hand is the ability of a country or an entity to produce a good or service at a lower opportunity cost compared to that of a competitor. In explaining the applicability of these two terms, a country may take advantage of its absolute advantage by engaging in the production of goods and services which it can produce efficiently and at a much lower cost per unit than any other country in order to boost its profitability.
Comparative advantage can be used where a country concentrates in the production of goods and services which it considers are having a lower opportunity cost compared to the other. An entity or a country may poses the expertise in producing more than one commodity, it will compare the cost of producing the two and give up on the costly one and concentrate on the production of the good which it is least disadvantaged in order to maximize on profitability (Liberty Fund, 2007).
International Trade influences a number of economic factors among them the foreign exchange rate. Countries in carrying out trade between themselves exchange currencies whereby one currency expressed in terms of the other in determining the equivalent value per unit is what is referred to as the exchange rate. Several factors influence the rate of exchange among them the International Trade itself whereby when a country imports more than it exports, there is more demand for foreign currency and less demand for its domestic currency hence the devaluation of the domestic currency which has a negative impact on its exchange rate. Another contributing factor is the capital movement; when a country is at apposition of attracting foreign investments contributing to large capital inflows, the demand for its currency increases creating an appreciation in value while capital outflow causes depreciation in the value of domestic currency.
Political factors also play a role in the exchange rate whereby the more politically stable economies have stable currencies and a strong domestic currency due to the ability to attract more investors as opposed to the politically unstable economies. Another equally important factor is the government policy; government policies have a role in determining the exchange rate through the involvement of the government in influencing the bank rates and through the purchase of foreign currencies and other influential businesses to create the strength of the domestic currency and boost the economy. The government can woo investors by offering attractive packages and tax cuts to attract foreign investments hence the demand for domestic currency is created which improves the exchange rate.
The other influential factor that affects the exchange rate is speculation, speculators have for long influenced the exchange rates whereby they follow certain repetitive happenings in the economic circle of a country and gauge their speculative actions to move the market in that directions where investors tend to shed off some currencies in anticipation for a future reduction in value, this can cause panic in the market creating less demand for certain currencies which influences the exchange rate. The last factor is change in prices; when commodity prices go up in one country making them costlier, the demand for those commodities in the foreign market decreases; this in turn causes a decrease in demand for the domestic…