Definition: International trade is a set of actions that aim to exchange capital, goods, and services between foreign countries across their international borders.
What Does International Trade Mean?
What is the definition of international trade? International trade allows firms to compete in the global market and to employ competitive pricing for their products and services. As more products become available to the market, consumers meet their needs and satisfy their wants, thus increasing customer satisfaction.
Moreover, the exchange of goods and services on a global level has a significant impact on a national economy as exports grow, thus increasing the balance of international payments and significantly contributing to a country’s gross domestic product (GDP).
Let’s look at an example.
Example
Italy and Greece produce olive oil and wine. Both countries produce 1,300,000 tons of both products, but Italy produces 500,000 tons of olive oil and 800,000 tons of wine annually, whereas Greece produces 900,000 tons of olive oil and 400,000 tons of wine annually. Furthermore, Italy requires 10 hours to produce one ton of olive oil and 5 hours to produce one ton of wine, whereas Greece requires 7 hours to produce one ton of olive oil and 4 hours to produce one ton of wine.
Although both Italy and Greece produce the same quantity of olive oil and wine annually, Greece needs less time to produce one ton per each product – a total of 11 hours as opposed to Italy’s total of 15 hours. Therefore, Italy focuses on the production of wine because it produces more tons in fewer hours and Greece focuses on the production of olive oil because it produces more tons in fewer hours.
In international trade, this is a comparative advantage, and it indicates the specialization of a country on particular products and services that can be produced at a lower cost. Therefore, both Italy and Greece continue to produce a total output of 1,300,000 tons per year, but at the lowest cost.
Summary Definition
Define International Trade: INTL trade means two countries exchanging goods across their borders.
