10 IMPORTANCE OR ADVANTAGES OF FOREIGN TRADE

Foreign trade is trade between two or more countries.

It is the exchange of goods, services and capital across international borders or boundaries.

The importance of foreign trade is as follows:

1. Specialization: Foreign trade leads to the division of labour and specialization at the international level.

This is because each country has a comparative advantage in the production of a particular good over other countries

Hence, each country concentrates on producing those goods over which it has a comparative advantage as encouraged by the theory of comparative advantage.

2. Availability of goods and services: No country can exactly produce everything it consumes.

Every country has to import one or more goods and services to ensure that goods and services are readily available for the citizens of a country.

Indeed, the freedom to import goods and services ensures that there is no scarcity of consumer goods such as food.

3. It helps in economic growth: Economic growth is a sustained increase in the real GDP of a country.

According to the expenditure approach, GDP is made up of four major components: Consumption, investment, government purchases and net export.

Foreign trade affects net exports considerably, which in turn affects Gross Domestic Product (GDP).

If a country's exports exceed its imports, then GDP will increase, which may result in economic growth.

Moreover, foreign trade helps to remove barriers to economic growth such as lack of capital goods, and lack of essential goods.

Additionally, foreign technologies can be imported through foreign trade, thereby resulting in an outward shift of the production possibilities curve, indicating economic growth.

4. Optimum use of national resources: Without international trade, some nations would not have been fully utilizing their natural resources.

Nigeria, for instance, can produce more crude oil for export thanks to the existence of foreign trade rather than just producing less crude oil for domestic use.

Foreign trade guarantees that natural resources be utilized to their full potential.

5. Creation of employment opportunities: Foreign trade creates employment opportunities for citizens of a country through export.

Export is foreign demand for local goods. If export increases, foreign demand for a country's goods increases as well.

As a result of increased exports, more people are employed to satisfy the rise in demand for goods and services.

Moreover, industrialization, which may result from an increase in foreign trade, can also create employment opportunities

6. Industrialization: If foreign demand for local goods and services increases, there will be a need to create more industries to cater for such increases.

As I mentioned before, this will result in more new people being employed to fill job openings brought about by new industries.

7. Increase in standard of living: Foreign trade raises people's standard of living by making goods available that otherwise would not have been available if there was no trade between two goods.

Indeed, when it comes to goods and services, consumers have a wide range of options to pick from thanks to the existence of foreign trade.

Furthermore, foreign trade creates employment opportunities, which can also improve the standard of living of citizens of a country.

8. Foster International peace: Since no nation is an island unto itself, it must rely on other nations for the supply of one good or another.

This promotes world peace because no government will want to start a war with a nation on which it depends heavily on the supply of basic goods and services to its inhabitants.

9. It helps in generating foreign exchange earnings: Foreign trade contributes to the production of foreign exchange earnings, which are the profits made from the sale of goods and services on the international market.

Foreign exchange earnings help pay the cost of imports. Indeed, the cost of importing capital goods, consumer goods, and technologies from abroad are airborne by foreign exchange earnings.

Without foreign trade, it is very unlikely that any country will be able to earn foreign exchange earnings because they won't be proceeds from exports.

Thus, foreign trade is essential for generating foreign exchange earnings

10. Economies of scale: To produce more output at a lower cost, production must be done on a large scale.

When a country has a global market to trade with, rather than its local market, it can gain economies of scale by producing more goods and services.

This is because the cost of production can be spread across a large number of outputs.

READ ALSO: DISADVANTAGES OF FOREIGN TRADE

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