An important aspect of economic activity is the trade between different countries. The international trade constitutes an essential aspect of economy. In international trade goods and services are exchanged across the national borders in exchange of mutually defined considerations. The globalization has played an important role in the development of international trade across different economies. Different theories of economics have lead to the development of international trade. The very basic theory behind international trade is that the markets or economies are imperfect, it means that every economy need different resources that are not available within the boundaries of respective countries therefore they need to involve in international trade.
The international trade has also motivated economies to acquire competitiveness with regard to its productions. As international trade has enhanced the level of competition from domestic to international, therefore every organization has to be very efficient. The concept of specialization and comparative advantage also boost the idea of international trade. It is generally assumed that every economy has some specialized field in which it has comparative advantage over other economies. International trade allows other economies to avail resources of other economies in which other economies are rich. The comparative advantage is achieved through the opportunity of producing a product on a low cost. The low cost can be acquired due to low labor cost opportunities, better and cheap transport facilities and technological advancement.
The two important constituents of international trade for a particular economy are its imports and exports. Imports and exports also determine the balance of trade also referred to as balance of payment for that particular economy. Within a specified period of time the balance of payment represents all legal transaction carried out between a particular economy and all other economies. If the net of the balance of payment is negative it means that the economy has more imports than exports in other words it can be concluded that more money is flowing out the economy and less money is flowing into the economy. The negative amount of balance of payment is referred to as balance deficit whereas a positive value for balance of payment is called trade surplus.
Though theoretically free trade among countries is regarded as a positive aspect, some countries sometimes apply barriers to specific international trade. In order to reduce trade deficit countries apply tariffs and taxes on imports. The tariffs and taxes on imports are meant to encourage the domestic economic activities as this increase the price of imported goods. In order to enhance domestic industries governments also distribute subsidies to the domestic suppliers.