Topic 1: INTRODUCTION TO INTERNATIONAL

TRADE

Lecture Notes Prepared by:

Dr. Martine Oleche
University of Nairobi
School of Economics

Dr. Martine Oleche, School of Economics,

09/11/18 1
University of Nairobi
 1.1 Definition and meaning of International
Trade
• International trade is the exchange of capital, goods and
services across international borders or territories.
• International trade is the trade that takes place between
one country and other countries. i.e. it is a trade
transaction that takes place between one or more
countries.
• It is different from domestic trade which takes place
within a country and uses local currency.
• International trade involves the use of international
currency(ies) and to obtain this, one has to go through
some procedures.
Dr. Martine Oleche, School of Economics,
09/11/18 2
University of Nairobi
 Definition and meaning of International Trade Contd..
• Czinkota etal defined international trade to consists
of transaction that are devised and carried out across
national boarders to satisfy the objectives of
individuals and operations.
• International trade uses a variety of currencies, the
most important of which are held as foreign resent
by governments and central banks.
• The US dollar is the most sought-after currency, with
the Euro in strong demand as well.

Dr. Martine Oleche, School of Economics,

09/11/18 3
University of Nairobi
1.2 Nature and scope of International Trade
• In most countries, international trade represent a significant
share of Net National product and Gross Domestic Product.
• International trade as the meaning implicate has been
presented throughout much of history, its economic social
and political importance has been on the rise in recent
centuries.
• Industrialization, advanced transportation, globalization,
multinational corporations and outsourcing are all having a
major impact on the international trade continuance of
globalization.
• Without international trade, nations would be limited to the
goods and survives produced within their own borders. The
main difference is that international trade is typically more
costly than domestic trade.
Dr. Martine Oleche, School of Economics,
09/11/18 4
University of Nairobi
•Nature and scope
International tradeofis, International
in principle, not Trade Contd..
different from domestic
trade as the motivation and the behavior of parties involved in
a trade do not change fundamentally regardless of whether
trade is across a border or not.
• The reasons is that a border typically imposes additional costs
such as tariffs, time costs due to border delays and cost
associated with country differences such as language the legal
system or culture.
• In international trade, the factors of production such as capital
and labor are typically more mobile within a country than
across countries.
• Thus international trade is mostly restricted to trade in goods
and services, and only to a lesser extent to trade in capital,
labor or others.
Dr. Martine Oleche, School of Economics,
09/11/18 5
University of Nairobi
1.3 Brief historical development of international trade
• The barter of goods or services among different peoples is an
age-old practice, probably as old as human history.
• International trade, however refers specifically on an
exchange between members of different nations and accounts
and explanations of such trade begin (despite fragmentary
earlier discussions) only with the rise of the modern nation-
state at the close of the European middle ages.
• As political thinkers and philosophers began to examine the
nature and function of the nation trade, trade with other
countries became a particular topic of their inquiry.
• It is, accordingly, no surprise to find one of the earliest form of
trade.

Dr. Martine Oleche, School of Economics,

09/11/18 6
University of Nairobi
Brief historical development of international trade
Contd…
• International trade has been in existence since ancient times.
Even in the Bible references were made to trading activities
between different countries.
• Illustration was made in the book of Genesis of sons of Jacob
who went to Egypt to buy grains.
• With increase in civilization and traveling added to the known
benefits of specialization and division of labor. International
trade among countries of the world has even increased
tremendously.
• Although early writers recognized the existence of international
trade, they felt that it was not much different from domestic
trade to warrant the existence of a separate theory.

Dr. Martine Oleche, School of Economics,

09/11/18 7
University of Nairobi
 Brief historical development of international trade
Contd…
• Adam Smith in his much celebrated work published in 1776
and titled “An Inquiry into the Nature and causes of the
wealth of Nation” was the first economists to propound the
classical theory.
• Ohlin (1933) argued that international trade” should be
regarded as a special case within the general concept of
international economics.
• He further argued that nations engaged in trading for the
same reasons for which individuals or groups within the
country trade with each other instead of each one producing
hisown requirement.

Dr. Martine Oleche, School of Economics,

09/11/18 8
University of Nairobi
 Brief historical development of international trade
Contd…
• The reason is that they are enabled to exploit the substantial
advantages of division of labor to their mutual advantage.
• Trade between different countries developed first where one
country could produce something desirable which others
could not.
• International trade, therefore owes its origin to the varying
resources and climate of different regions.

Dr. Martine Oleche, School of Economics,

09/11/18 9
University of Nairobi
 1.4 Basic concepts and reasons for international trade
• International trade refers to buying and selling of goods and
services between countries e.g. between Kenya and the
United States of America, Ghana or Australia etc.
• In other words the term "international trade” refers to
exchange of goods and services that take place across
international boundaries. International trade is simply defined
as the trade across the borders of a country.
• This may be between two countries, which is called bilateral
trade or trade among many countries called multinational
trade.
• International trade is to enable countries obtain the greatest
possible advantage from the exchange of one kind of
commodity or another.

Dr. Martine Oleche, School of Economics,

09/11/18 10
University of Nairobi
 Basic concepts and reasons for international trade
Contd…
The reasons for International Trade include:
1.4.1 Opportunity Cost
• This is simply the value of using a resource; measured in
terms of the value of the best alterative for using that
resource.
• International trade occurs because no single country has the
resources to produce everything well. The products a country
decides to produce depend on what must be scarified to
produce them;
• That is, whatever resources a country uses to produce one
product are no longer available for producing some other
product.

Dr. Martine Oleche, School of Economics,

09/11/18 11
University of Nairobi
 Basic concepts and reasons for international trade
Contd…
• Those things we have to give up in order to get more of what
we want are called opportunity cost, and they determine
what countries produce for trade.
• For example, Saudi Arabia exports crude oil. The Saudis could
have chosen to export wheat, but they lack the resources (the
arable land, the water, and climate) to grow wheat efficiently.

Dr. Martine Oleche, School of Economics,

09/11/18 12
University of Nairobi
Basic concepts and reasons for international trade
Contd…
1.4.2 Comparative Advantage/Factor Endowment
• The United States also produces both crude oil and wheat, but
its opportunity cost is lower than Saudi Arabians. Having
smaller reserves of oil and more than ten times the arable
land, the united states has to give up only a few barrel of oil
(compared with Saudi Arabians innumerable barrels of oil) to
produce a bushel of wheat.
• Thus, in the production of wheat, the united states has a
comparative advantage; that is, it has the ability to produce a
given product at a lower opportunity cost than its trading
partners.

Dr. Martine Oleche, School of Economics,

09/11/18 13
University of Nairobi
Basic concepts and reasons for international trade
Contd…
• Factor endowment consists of differences in capital, labor and
land.
• For example, a rich nation like the united states has a large
amount of expensive capital equipment hence can specialized
in goods such as chemicals, automobiles.
• Other nations with an abundant labor supply like Japan finds
it efficient to concentrate on making television sets, which
require the assemblies of components by hand.

Dr. Martine Oleche, School of Economics,

09/11/18 14
University of Nairobi
Basic concepts and reasons for international trade
Contd…

1.4.3 Absolute Advantage

• If a nation is the sole producer of an item, it has an absolute
advantage over all other nations in terms of that item.
• Another absolute advantage exists when one nation can make
something more cheaply than its competitors.
• An absolute advantage is a nation’s ability to produce a
particular product with fewer resources (per unit of output)
than any other nation.
• This absolute advantage might exists because for instance the
Saudis have been growing wheat far longer than people in the
united states or because the Saudis are simply more talented.

Dr. Martine Oleche, School of Economics,

09/11/18 15
University of Nairobi
Basic concepts and reasons for international trade
Contd…
1.4.4 Competition
• International trade gives room to competitors. Foreign goods
competes with the local goods in the market. Foreign markets
may grant local manufacturers greater potentials for growth.
1.4.5 Access to Capital/Greater Returns on Capital
• International trade enables countries with limited capital to
either borrow from capital rich countries or attract direct
investment into the countries.
• They therefore enjoy the benefits imported capital and
technology investment abroad may yield higher returns than
additional domestic investment, particularly where the
foreign market is growing.
Dr. Martine Oleche, School of Economics,
09/11/18 16
University of Nairobi
Basic concepts and reasons for international trade
Contd…
1.4.6 Economic and Social Development
• International trade increases the economic and social
development of the under developing countries.
• Other reasons for international trade are: differences in
tastes, differences in industrial development and the level of
technology, existence of special skills in some countries and
differences in climate.

Dr. Martine Oleche, School of Economics,

09/11/18 17
University of Nairobi
1.5 International Trade and International Business
Compared
• International trade is a business transaction between the
nationals of two different countries. For example, a Kenyan
businessman can import a consignment of a product from a
British producer. He needs not to know anything about the
business environment of Britain.
• But opening an international business is more involving.The
operator must study and understand the international
business environment such as culture, a legal, economic
factor which prevails in the environment he would want to
locate his business.

Dr. Martine Oleche, School of Economics,

09/11/18 18
University of Nairobi
1.6 Prevailing problems of international trade
• Engaging in International trade is a sophisticated activity. It
requires great corporate, personal and business skill,
experience and knowledge.
• International trade is being influenced by the following
problems:
a. Cultural differences: Deep cultural differences like social
expectations, manners and methods of doing business can be
persistent problems to a country who is about to enter into a
bilateral or multilateral agreement.
b. Currency problem: Trading between sovereign nation creates
financial complications because currencies are not of equal
value and the rate of exchange between currencies are not
fixed.

Dr. Martine Oleche, School of Economics,

09/11/18 19
University of Nairobi
Prevailing problems of international trade Contd..
c. Legal protection: countries often limit International trade by
legal means. Example tariff, quota and embargo. This
protective tariffs and quotas is to encourage the growth of
domestic industries and to protect them from price
competition from foreign companies.
d. Foreign political climates: these are often unpredictable. For
example, terrorism and foreign tax structures may be favored
to business.
e. Foreign business climates and methods may create ethical
problems. Example bribery is more widely accepted in Kenya
than in the United States.

Dr. Martine Oleche, School of Economics,

09/11/18 20
University of Nairobi
1.7 Forms of International Trade
• There are a number of ways in which Nations can participate
in International trade.
1.7.1 Direct Exporting
• This form of international trade involves soliciting orders from
foreign countries for goods and services that are made in a
country and then shipped abroad.
• For example, without International trade, the market for the
Kenyan tea, crude oil, coffee, etc would have been limited to
domestic economy.
• Export of goods and services act as foreign exchange earners
to the domestic economy. Foreign exchange availability is
essential requirement for the survival of any national income.

Dr. Martine Oleche, School of Economics,

09/11/18 21
University of Nairobi
Forms of International Trade Contd…
1.7.2 Foreign Licensing
• This is another important form of trade that exists between
two or more countries.
• It involves a country soliciting another country to produce and
sell her product to them in a fee and after due procedural
arrangement have been made which binds the elements of
such countries contract.
• This is generally used for goods with established brand names.

Dr. Martine Oleche, School of Economics,

09/11/18 22
University of Nairobi
 THE END

THANK YOU
Dr. Martine Oleche, School of Economics,
09/11/18 23
University of Nairobi