Basis or Reasons for International Trade

International trade refers to the exchange of goods and services between countries. Goods sold to other countries are referred to as exports and goods bought from them are called imports.

The underlining basis of trade is the same, whether trade takes place between individuals or between business enterprises, on a regional basis within a country or internationally between countries. Under this section, the question “Why do nations trade?” is answered. There have been various answers to this question, some of which are:

1. Differences in Factor Endowment:

Countries are endowed differently e.g. differences in climate and soil, differences in availability of natural resources, differences in capital endowment and differences in labour skills. These differences translate into differences in the abilities of countries to produce goods and services. Some countries, because of their factor endowments, can produce certain goods cheaper than other countries. For example, Nigeria is endowed with crude oil and natural gas. These can be produced cheaper in Nigeria than in Liberia. Liberia, therefore, imports them from Nigeria. This is an example of International trade.

2. The Need to Satisfy Certain Wants:

Countries are faced with the demand for goods and services that their factor endowments cannot produce. In order to satisfy these wants, they are sourced from foreign countries as imports. Nigeria imports capital equipment for its oil sector from other countries in the world. Other countries in the world, in turn, import crude oil from Nigeria.