Chapter

Trade

II:

Fundamentals

of

Importance of trade.
No single country produces
everything that its people need. In a world where every man
must depend upon other persons for many things he needs, and
where nation must trade with nation, the importance of trade
becomes apparent. If it were not possible to exchange the
product of ones labor for the products produced by others ,
each and everyone would have to produce what he needs
thereby reducing production to an almost insignificant level.

Both deal in the same objects of exchange, that is, goods and
services.
Both kinds of trade are carried on by individuals and business
firms. In this connection, it may be pointed out that as long as
the people enjoy a wide latitude of economic freedom, the
individuals will seek those occupations and professions to which
their talent, aptitude and ability are well suited. A number of
businessmen establish business firms for the purpose of
promoting their interests to their greatest advantage.
Both domestic and international trade are stimulated by the
desire for profit.
Striking Differences

Purchases and sales of

Trade, defined.
Trade may be described briefly as an 1. Independent Currency System.
goods within a domestic market are negotiated with money or
economic activity which deals with an exchange of goods and
currency that is uniform in all parts of the country. If a person
services motivated by a desire for profit. While this activity
from Manila sells his products in Davao, the buyers will pay
represents as the exclusive prerogative of some governments
him in Peso. In international trade, however, the existence of
as those of socialist and communist countries, those which
independent currency systems as well as banking institutions
adhere to a system of free private enterprise vests it as the
has to be reckoned with. International trade involves buying
privilege and right of its citizens.
and selling of goods between countries with different
currencies (e.g. USAs Dollar, Japans Yen, Chinas Yuan,
Kinds of Trade
Malaysias Ringgit). If a Filipino buys a product from America,
Fundamentally, there is not much difference between
he has to pay the seller not in Peso, but in the currency of the
international (or foreign) trade and local (or domestic) trade,
sellers country (i.e. Dollar).
inasmuch as both represent private merchandising activity 2. Tariffs and Other Trade Restrictions. In domestic trade,
which consists of the purchase and sale of commodities
there are no trade barriers such as tariffs and quotas. In
entering into the exchange transaction. Such activity is made
international trade, such barriers exist. In ancient and
possible by individuals who take long journeys to get the things
medieval times, tariffs were primarily levied for purposes of
that are wanted and desired by others. They are called traders.
revenue needed by the government. However, within recent
It led others to act as merchants who stayed in one place and
times, governments have used tariffs for the purpose of
sent someone else to get things for them. All such individuals in
regulating the flow of imported merchandise into their
the pursuit of trade are always motivated by profit. In
countries so as to protect domestic industries.
international trade, the objects of exchange cross political 3. Movement of labor and capital.
In domestic trade, the
boundaries and destined for other countries. Thus, such goods
movement of labor and capital is relatively easier than in
usually cover greater distances than those which become
international trade. It is easier for a Filipino in the province to
objects of domestic trade transactions. Briefly stated, the
search for a job within the country (e.g. Manila) than to go
movement of goods in domestic trade is confined within the
abroad.
borders of a country.
4. Nature of the market. Differences in the habits and tastes
of the people, in their language and business customs, make
Basic Similarities
the carrying of foreign trade a more complicated pursuit than
domestic trade. For instance, a Filipino owner of a fast food

chain wants to establish a branch in Malaysia, which is a

Muslim country. The Filipino businessman must take into
consideration the culture of the Malaysians and make the
appropriate adjustments (e.g. making sure that what they
serve is halal). Such adjustments wont be necessary in
domestic trade since the buyers and sellers share the same
culture and customs.
Important Bases of International Trade
The following are the factors or reasons that explain why
international trade exists:
1. Differences in Environmental Conditions.
As already
indicated, no nation is self-sufficient. Even the United States,
which is considered as the wealthiest and mightiest nation in
the world today, has to depend upon other countries for some
of its requirements. For example: Middle Eastern countries are
mainly deserts in which fruit trees arent common. Thus,
Middle Eastern countries import (buy) the fruits that they
need/want from other countries, especially from tropical
countries which are abundant with fruits.
2. Stage of Economic Development.
Broadly speaking,
countries may be classified as falling under two categories,
the underdeveloped (poor) countries and the highly developed
(rich) countries. Underdeveloped countries are the major
producers of many raw materials, while developed countries
mainly produce manufactured goods. For example: Singapore
is a highly developed country with no agricultural land. So
where do they get the rice, fruits, and vegetables they need?
They will import it from underdeveloped countries (e.g.
Thailand, Vietnam) which primarily focus on agriculture and
natural resources. On the other hand, the underdeveloped
countries will purchase the machines, equipment, and
technology that they lack from the highly developed
countries.
3. Population Distribution.
Sometimes, a countrys
production of a good exceeds the purchasing capacity of its
population. What the country will do with the surplus or extra
supply of goods is that they will export or sell it to other
nations.
4. Transportation and Communication Facilities.
In the
early days, trade did not assume considerable importance

because of the lack of adequate transportation facilities. It

was difficult to sell goods abroad, especially perishable items
such as meat, dairy products (e.g. milk), fruits and vegetables
which will easily spoil during the travel. However, due to
recent developments in transportation (refrigerated ships,
planes), delivering goods to other countries has become easy
and more common. Improvements in communication have
also contributed to the increase of international trade. Now, if
you want to buy a product in America, you can just order it
through the Internet.
5. Price Structure.
If trade is legally free to move, it is
because of the difference in money costs and money prices of
goods in different countries which determines their
movement. As a matter of fact, the difference in price
structures is responsible for either an increase, decrease, or
even a change in the direction of trade. For example: Many
Filipinos purchase Chinese products due to their cheapness
(low prices). The Chinese producers/businessmen continue to
export or sell their products in the Philippines because they
know that Filipinos patronize their products.
Items of International Trade
The items of international trade consists of goods (visible items)
and services (invisible items). Based upon their movement and
destination, such items are classified as imports and exports.
The Nature of International Trade
No country can export unless another country imports since
they are complementary to one another, that is, for every
export, there is a corresponding import.
The Importance of Exports. Exports are highly significant to
a country in that they provide the means (foreign currency) with
which it could pay for her exports. It is argued by many that
export trade is desirable because the demand of the combined
markets of the world is greater than the demand of the market
of a single country.
Balance of Trade. The ratio between a countrys exports and
imports is generally termed as the balance of trade. When a
country has a trade surplus (the value of its exports exceeds
those of its imports), that country is said to be enjoying a

favorable balance of trade. Conversely, when the value of its

imports exceeds those of its imports, then the country is said to
be suffering from an unfavorable balance of trade (trade
deficit).

commerce and trade, only inhabitants of such regions would

benefit from their production. Trade has contributed to the
widespread benefits arising from exchange. For example,
without international trade, we would not be able to benefit
from the computers and other technological innovations made
in America.
Advantages of International Trade
6. To the economic benefits we derive from international
trade, cultural advantages may be added.
1. International trade gives rise to improved production
The frequent interaction fostered by trade has not only
and specialization through geographical division of
maximized the advantages of production and specialization,
labor.
but at the same time has contributed to mutual understanding
As nations of the world are endowed differently from one
of the ways of life, customs, philosophies, and traditions of
another with respect to the distribution of natural resources,
people. This mutual understanding contributes greatly in turn
population, skills, talents, and attitudes, each nation tends to
to better respect, promotion of goodwill, and a feeling of
produce from a given quantity of resources a larger volume of
brotherhood among men, thus insuring peaceful relations
goods which it finds profitable. In the process, nations find it
among the peoples of the world. As such, international trade
to their advantage and interest to specialize resulting in a
serves not only as a medium of cross-cultures but also as a
geographical division of labor.
strong link between the activities of peoples in all parts of the
2. International trade helps to assemble the things each
world.
nation needs.
Countries do not possess everything that they need, thus the
need for international trade. Some countries have little supply The Paradox of International Trade
of oil, so they have to buy it from other nations which have
abundant supply of it. Even as you go to the grocery, you will Despite the manifold advantages brought about by international
see many foreign brands of products because they are not trade, one cannot afford to ignore certain disadvantages in the
made locally.
form of international complications, such as:
3. It helps raise peoples standard of living.
It can be said that international trade provides the means of 1. Bitter Struggle for Markets and Raw Materials.
maintaining a high level of employment in a country as well as
Throughout the 19th century, the competition of the leading
high standards of living.
industrial nations for the principal markets of the world was
4. It serves as a vehicle for alleviating the difficulties that
very intense and severe. Those industrial nations sought
attend congested regions of the world.
colonies not only as markets for their manufactured goods but
Through international trade, countries which are densely
also as sources of raw materials for their factories. Thus,
populated and handicapped by limited food resources can get
nations have clashed in bloody conflicts due to the desire of
their supply by exchanging their manufactured products for
the strong and aggressive countries to establish political
food. For example, the Philippines occasionally experiences a
control over countries necessary as outlets for their
shortage in rice supply, so the government imports (buys) rice
manufactured products, just as they endeavored to establish
from other countries. Through international trade, the
control over the sources of the worlds essential raw materials.
shortage problem is solved.
2. Desire for Economic Self-Sufficiency.
In recent years,
5. Exchange of goods tends to increase the total utility of
many nations have displayed a strong desire to become selfthe goods entering the transaction.
sufficient in principal products and commodities; this desire
It is self-evident that if goods remain in regions where they are
compelled them to embark on programs designed to foster
produced on account of their failure to enter the stream of
economic nationalism. A nation committed to such a program

will build its economic life providing within its own borders all
the commodities vital to its existence and prosperity. At the
same time, such a nation is determined to free itself from
being independent on other nations for goods. One of the
visible and obvious results of economic nationalism has been
the establishment of tariff walls designed to restrict the entry
of goods and products from foreign countries. Beyond doubt,
these tariff walls have merely served as instruments for
generating an atmosphere of suspicion, ill-feeling, and
mistrust if not hatred among nations.
3. Economic Interdependence.
If one of the aims of
government is a high standard of living for its people, then

specialization, in accordance with the resources of nations is

not only necessary but indispensable. Industrial nations must
devote a major part of their economic efforts to the production
of commodities intended to meet the requirements of peoples
in other countries. In turn, these countries depend on many
products beyond their borders for the satisfaction of their
needs and wants. For example, the Middle East has a large
supply of oil, and many countries buy oil from it, especially
those countries with no oil supply of their own. Such countries
become dependent to the Middle East, and if the Middle East
decides to raise the price of oil, other nations will have no
choice but to spend more.