Importance/Role of foreign trade in economic development of countries
Introduction of foreign trade:
There is no country in the world today which produces all the commodities it needs. Every country, therefore, tries to produce those commodities in which it has comparative advantage. It exchanges part of those commodities with the commodities produced by other countries relatively more efficiently. The relative difference in factor endowments, technology, tastes etc, among the nations of the world have greatly widened the basis of international trade.
Role of foreign trade in economic development
The role of foreign trade can be judged by the following faces:
- Foreign trade and economic development.
Foreign trade plays very important role in the economic development of any country. Pakistan also exports a lot of agricultural product to other countries and imports the capital goods from other countries. Therefore, it is not wrong to say that economic development of a country depends of foreign trade.
- Foreign exchange earning
Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes.
- Market expansion
The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the producers. In Pakistan home market is very limited due to poverty. So it is necessary chat we should sell our product in other countries.
- Increase in investment
Foreign trade encourages the investor to increase the investment to produce more goods. So the rate of investment increases.
- Foreign investment
Besides the local investment, foreign trade provides incentives for the foreign investors to invest in those countries where there is a shortage of investment.
- Increase in national income
Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase the production on large scale so GNP also increases.
- Decrease in unemployment
With the rise in the demand of goods domestic resources are fully utilized and it increases the rate of development in the country and reduces the unemployment in the world.
- Price stability
Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices.
- Specialization
There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through international trade.
- Remove monopolies
Foreign trade also discourages the monopolies. Where every any monopolist increases the prices, government allows the import of goods to reduce the prices in the country.
- Removal of food shortage
India is also facing the food shortage problem. To remove the food shortage India has imported the wheat many times. So due to foreign trade we are solving this problem for many years.
- Agricultural development
Agricultural development is the back bone in our economy. Foreign trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them.
- Import of consumer goods
India and Pakistan imports the various consumer goods from other countries, which are not produced inside the country. Today the shortage of any commodity can be removed through international trade.
- To improve quality of local products
Foreign trade helps to improve quality of local products and extends market through changes in demand and supply as foreign trade can create competition with the rest of the world.
- External economics
External economics can also be achieved through foreign trade. The industries producing foods on large scale in Pakistan and India are enjoying the external economics due to international trade.
- Competition with foreign producers
We can compete with the foreign producers in foreign trade so it improves the quality and reduces the cost of production. It is also an advantage of foreign trade.
- Useful for the world peace
Today all the countries are tied in trade relations with each other. So foreign trade also contribute to peace and prosperity in the world.
- Import of capital goods and technology
The inflow of capital goods and technology in the less developed countries has increased the rate of economic development, and this is due to foreign trade.
- Import substitution
These countries not only produce import substitute, but also reduce deficit in balance of payment of their countries.
- Better understanding
Foreign trade provides an opportunity to the people of different countries to meet, discuss, and exchange views and ideas related to their social, economic and political problems.
- Dissemination of knowledge
Foreign trade is also responsible for dissemination of knowledge and learning from developed countries to under developed countries.
- Interdependence
Foreign trade is responsible for creating economic depending and establishing economic interest in the economy of the countries having trade relations.
- Factors productivity
Through foreign trade the productivity of labour and capital and organization increases. Demand make them mobile on national as well as international level which helps underdeveloped countries to develop and maintain a high level of growth of developed countries.
