Explain the meaning and role of foreign trade.
Foreign trade refers to trade between different countries of the world. Trade plays an important role in economic development. It is basically the engine of growth. In developed countries, trade accounts for a significant share of Gross Domestic Product (GDP).
The role of foreign trade can be explained as follows:
- To earn foreign exchange: Foreign trade provides foreign exchange which can be used for very productive purposes. Foreign trade contributes to expanding the market and encouraging production.
- Encourages Investment: Foreign trade creates an opportunity for the producers to reach out to customers beyond the domestic markets. It encourages them to produce more goods for export. This leads to an increase in total investment in an economy.
- Division of labour and specialization: Foreign trade leads to the division of labour and specialization at the world level. Some countries have abundant natural resources, they should export raw material and import finished goods from countries which are advanced in skilled manpower. Thus, foreign trade gives benefits to all countries thereby leading to the division of labour and specialization.
- Optimum allocation and utilization of resources: Due to specialization, resources are channelized for the production of only those goods which would give the highest returns. Thus, there is rational allocation and specialization of resources at the international level due to foreign trade.
- Stability in price level: Foreign trade helps to keep the demand and supply position stable which in turn stabilizes the price level in the economy.
- Availability of multiple choice: Due to foreign trade, many products from foreign countries become available in the domestic market. So, consumers get a choice of a wide variety of imported commodities. The foreign trade is highly competitive and so, the products are standardized and of good quality. It raises the standard of living of people.