International Trade

Ricardian Comparative Cost Theory of International Trade - Macroeconomics 

                                                                                                               - Find it in the end of the article

Introduction to International Trade

In the modern age, every economy is a dependent economy. It has to import and export goods and services to survive. A country imports if needed and exports its goods if it becomes higher production normally. The international trade has played very important role in the development of different countries through mutual co-operation and benefits. The back warded countries may remain same if they start ignoring international trade. Nepal is a least developed country and it is very back  in the modern technologies. It has just recently registered its name in the list of medium per capita income countries in 2020. It is not possible to make the phase of development smooth for developing country like Nepal without the international trade.

Concept of International Trade

In a simple sense, International trade is the exchange of the goods and services or the trade relationship out of the national territory. We can name it foreign trade or external trade.
Economists D.G. Luckett describes, '' The purchase of goods and services by the citizen of one country from the citizen of another country is called international trade.''

Importance of International Trade

In the modern time all the countries of the world are dependent upon one another. No country in the world is self sufficient. Even the developed countries in the world have to depend upon the other countries. thus all the countries in the world are getting mutually dependent to a growing extent. The major importance are:

  1. Quality and cheaper goods : International trade really creates a competition among the producers which eventually helps in the improvement of the quality. On going to the topic, cheap we easily can find the variety of goods and services. The different producer can target different customers so that one can find the cheap to expensive goods easily.
  2. Agricultural development : International trade directly helps to exchange the technologies and the method of the working. For example, the countries like Nepal who are depending upon the traditional agricultural method can uplift their performance through the modernization.
  3. Standard of Life : The problem of poverty and the low standard of life can be mitigated through the international trade. When a family gets world class market easily then it can easily uplift its standard of life.
  4. Industrial Development : A country can only achieve its industrial goal when it gets world class technology, ideas and the co-operation. Hence industrial development is only possible with the international trade.
  5. Competition : High level competition may occur in the national and the international market. Which purifies the best alternatives or the options of the brands and the producers in the market. However, competition is very necessary in the market but a healthy competition can only make the sustainable development. 
  6. Employment opportunities : The international trade increases the employment opportunities in the national and the international territories which is very beneficial to uplift the living standard of life. When international trade exists it opens many multinational companies and the job opportunities increases. International investments also increases.
  7. Foreign Relation : International trade helps to improve the foreign relationship. In the other word the international trade helps to maintain the public to public relation between different countries. International trade helps to know and exchange the ideology, culture and the other relations.
  8. Government Revenue : When the volume of the trade increases the direct and indirect tax of the government also increases. It can generate tax and revenue from international trade and companies too which finally helps in the development of the different sector.


Nepal's Foreign Trade

Before 1951, Nepal's foreign trade was with only India and Tibet. But after that Nepal expanded the international trade with many countries in the world like Japan, USA, Germany, Malaysia, Singapore, Thailand, Kuwait, France, Bangladesh, Spain, etc. Now Nepal does foreign trade with most of the countries but the import rate is higher than the export rate, that's why Nepal bears the trade deficit every year. Nepal is being unsuccessful to export the finished goods. It exports raw materials in maximum quantity in its export.

Composition of Nepalese Foreign Trade

Composition of the trade refers to the composition of import and export. Here you can be able to see the composition of Nepalese trade in the fiscal year 2018/2019.

According to Standard International Trade Classification(SITC)

 S.N                SITC Groups Export Rs.Crore Export % Import Rs.CroreImport % 


 
 1.
 food and live animals 2085.7 25.55 15111.2 12.16
 2. tobacco and beverage 24.8 0.30 228.6 0.67
 3. crude materials and inedible 315.8 3.87 4198.4 3.38
 4. minerals, fuel and lubricants 1.4 0.02 198883.6 15.92
 5. animals and vegetable oil and fats 40.6 0.50 2861.2 2.30
 6. chemical and drugs 470.3 5..76 12557.7 10.10
 7. classified by materials 3720.4 45.57 27989.3 22.52
 8. machinery and transportation equipment 145.2 1.78 31400.3 25.27
 9. miscellaneous manufactured articles   1359.2 16.65 6332.2 5.09
 10. not classified 0.00 0.00 3220.4 2.59
  Total 8163.3 100.00 124282.7 100.00
                                                                                  Source- Economic survey, 2018/2019


Note: Nepal does most of its international trade with India. Nepal did 65% of its total trade with India in 2017/2019 fiscal year.

Problems of Nepalese Foreign Trade

  1. Landlocked country
  2. Low export and high import
  3. low quality good
  4. Bad foreign strategics
  5. Lack of perfect policy
  6. Lack of government attention
  7. Government Subsidies 
  8. Brain Drain
  9. Lack of diversification
  10. Tough foreign competition


Ricardian Comparative Cost Theory of International Trade

The comparative cost theory of international trade was introduced by classical economists David Ricardo. Therefore this theory is also known as classical theory of international trade. This theory is based on the assumption that the production of similar goods in different countries has difference in cost of production due to the various reasons like, availability of raw materials, efficiency of manpower, climate etc Thus each country is specialized to produce such goods in which the comparative cost of production is least.

Assumptions: 

  1. There are only two countries and two similar commodities.
  2. Labor is one and only factor of production.
  3. There is no transportation cost.
  4. The resources are perfectly mobile within the country but perfectly immobile between the countries.
Let's observe it in the table,
 Countries Cotton(c)  Jute (J) 
  Labor hour/kg opportunity cost Labor hour/kg opportunity cost
 India 4 1C=2J 2 1J=1/2C
 Nepal 15 1C=3J 5 1J=1/3c

From the above table, according to the comparative cost theory of the international trade both countries will gain if they produce according to the theory. It is clear that India;s opportunity cost of producing 1 kg cotton is 2 kg jute and Nepal's 1 kg opportunity cost of producing 1 kg cotton is 3 kg jute. hence by analyzing the opportunity cost one should produce that goods which costs least in the country.