Domestic vs International Trade free essay sample

Domestic Vs International Trade Mohammad Tariqul Islam Domestic Trade: Trade among parties in the same country. Domestic trade is the exchange of goods, services, or both within the confines of a national territory. They are always aimed at a single market. It always deal with only one set of competitive, economic, and market issues. The trading is always with a single set of customers all the time, though the company may have several segments in a market. Finally local trade or home trade or Domestic trade may be sub-divided into Wholesale trade, and Retail trade. International Trade: Trade among parties residing in different countries. International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. Some difference between International trade and local or domestic trade International trade is in principle not 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 main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as  tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that  factors of production  such as capital and  labour  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 other factors of production. Advantages and Disadvantages of international Trade Advantage of international trade †¢ Monetary gains to the respective country indulging in trade. †¢ More variety of goods available for consumers. †¢ Better quality of goods. Competition both at the international level as well as local level. †¢ Closer  ties  between nations. †¢ More exchange of technical know-how. †¢ Local producers will try to improve the quality of their products. †¢ Increase in  employment  locally. Disadvantage of international trade †¢ Local production may suffer †¢ Local industries may be overshadowed by their international competitors †¢ Rich countries may influence political matters in other countries and gain control over weaker nations. †¢ Ideological differences may emerge between nations with regard to the procedures in trade practices. International trade is beneficial to world economy. It adds to the money coffers of the world at large. Every country can benefit monetarily if it is able to dispose off its surplus goods after meeting the requirements of the local people. Key differences: †¢ International trade is, in principle, not 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 main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. †¢ Another difference between domestic and international trade is that 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 other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. †¢ Within a country labour and capital moves freely to get maximum returns. These factors of production do not move with such freedom among different countries due to differences in culture, climate, language, customs and political restrictions imposed by regulatory authorities. This immobility gives rise to wage and interest differentials among countries. †¢ Different currency system introduces additional cost and risk in international trade as the value of currencies is constantly subject to variations. As long distances involved transport costs for international transactions are higher than for domestic trades. Home trade is called domestic trade in some countries. These are the differences as seen by me. 1. For home trades, payments could be made in home currency only. Foreign trades are to be paid invariably in convertible currencies. 2. Home trades generally have no restrictions of movement within the country. In international trade, there are restrictions as to movement of specific goods to specified countries. 3. Home trades have taxes levied by the Government and local bodies. International trades have levies called customs duties. These invariably go to the Federal Government. 4. Documents for domestic trades are comparatively simple and easy to understand and follow. Foreign trades have a different set of documents which must be filed in every case. 5. Insurance of consignments sent on foreign trade are compulsory; in home trade it is optional. 6. Usually, foreign trades are preceded by payment or promises of payment made by international foreign exchange traders (also called Letters of Credit. In domestic trades, payments are realised usually after the trade is executed. Depending on the credit rating of the parties concerned, even a simple promise is not taken. Letters of Credit in domestic trades is not common but not ruled out. 7. Credibility of parties can be got verified in foreign trades through the trade representatives of the countries involved in the transaction. 8. On receipt of consignment at a foreign country, the documents are handed over t o the buyers only after payment is realised. Thereafter, the Banks concerned remit the payments to the sellers through normal international banking channels. In respect of domestic trades, bankers may or may not be the intermediaries. Payments can be directly sent to the sellers by the buying party. 9. Under the United Nations charter, goods prohibited for specific countries cannot be sent to them by member countries. Penalties extending to boycott of trade with that country may follow. In domestic trades, such prohibitions do not exist. (Example: selling atomic energy raw materials to Iran, Iraq etc. 10. International trades are further government by agreements between member countries of General Agreement on Tariffs and Trade. Domestic or home trades are not subject to such agreements. An international business is a business whose activities are carried out across national borders. This differs from a domestic business because a domestic business is a business whose activities are carried out within the borders of its geograp hical location. A domestic company is one that confines its activities to the local market, be it city, state, or the ountry it is in. It deals, generally, with one currency, local customs and cultures, business laws of commerce, taxes and products and services of a local nature. The international company, on the other hand deals with businesses and governments in one or more foreign countries and is subject to treaties, tariffs. currency rates of exchange, politics, cultural differences, taxes, fees, and penalties of each country it is doing business in. It may also be conducting business in its home country, but the emphasis is on trading in the international marketplace. Differences between Domestic and International Trade International Trade: The exchange of goods and services between countries is called International Trade. Inter-Regional Trade: The exchange of goods and services with in a country is called Inter-regional Trade. Differences between International and Inter-regional Trade and need for a separate theory: A number of things which make difference between international and inter-regional are given as under. We can understand from these reasons that it gives rise to a separate theory of international trade. . Factor Mobility: Labour and capital as factor of production do not move freely from one country to another country as they do with in the same country. Thus labour and capital are regarded as immobile between countries while they are perfectly mobile within a country. Adam Smith said â€Å"Man is of all forms of luggage, the most difficult to transport†. Differences in cost of production can not be removed by moving and money. The result is the movement of goods. On the contrary between regions with in the same olitical boundaries, people distribute themselves more or less according to the opportunities. Real wages and standard of living tend to seek a common level though they are not wholly uniform as between national these differences continue to persist and check population movements. Capital also does not move freely from one country to another country. 2. Different Currencies: Each country has a different currency. Buying and selling between nations give rise to complications absent in internal trade. This hampers smooth flow of trade as between one country and another country. A large number of foreign exchange problems arise in number of foreign trade which are non-existent in inter-regional trade. 3. Different National Policies: Different needs lead countries to pursue divergent national policies and not only with respect to foreign exchange rates. National Policies differ in a wide matter of domestic matters affecting international economic relations, wages, prices, competition, investment, business regulation etc and often involve interference directly in international economic intercourse in tarrifs, exchange controls, non-tarrif barriers and the like. . Different Political Circumstances: Mostly countries differ in political circumstances. In inter-regional trade, trade takes place among same people. But international trade takes place among people of different cultures, habits and languages. These cultural distinctions between markets, important in the absence of different national measures have led political scientists to take look at the nature of countries. 5. Difference in National Resources: Different countries are endowed with different type of natural resources. They tend to specialise, in the production of those commodities in which they are richly endowed and trade them with others where such resources are scare. 6. Geographical and climatic differences: Every country cannot produce and commodities due to geographical and climatic conditions, except at possibly prohibitive costs. Countries having climatic and geographical advantage specialise in the production of particular commodities and trade them with others. 7. Different Markets: International markets are different in various aspects. Even the system of weights and measures and pattern and styles in machinery and equipment differ from country to country. Goods which are traded within regions may not sold in other countries. This is why in great many cases products to be sold in foreign countries are especially designed to confirm to the national characteristics of that country. 8. Problem of Balance of Payments: The problem of balance of payments is perpetual in international trade while regions with in a country have no such problem. 9. Restrictions on Trade: Trade between different countries is not free. There are restrictions imposed by custom duties, exchange restrictions, fixed quotas or other tarrif barriers. 10. Ignorance: Differences in culture, language and religion stand in the way of free communication between different countries. In inter-regional trade labour and capital freely moves about. These factors too make internal trade different from international trade. 11. Transport and Insurance Costs: The cost of transport and insurance also check the free international trade. The greater the distance between the two countries the greater the cost and insurances.