Factors Influencing International Trade

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Ships carry cargo all over the world.
Ships carry cargo all over the world. (Image: Stephen Schauer/Lifesize/Getty Images)

International trade is the exchange of commodities, products, services, capital between people and companies in different countries. It forms a significant part of many counties' Gross Domestic Product, GDP. International trade has existed for a long time, but trade has increased hugely in the past few hundred years and has a major impact on the economies of many countries.

Exchange Rate

The exchange rate is the price of one currency in terms of another. Exchange rates fluctuate depending on the demand for a particular currency. If there is a high demand for a country's currency then its price will tend to rise. Because currencies fluctuate in price it can often be cheaper to buy goods in one country and sell them in another. Because of this exchange rates have a major impact on international trade.

Competitiveness

Competitiveness is a measure of the relative ability of different countries to provide different products or services. Competitiveness takes into account the efficiency, costs of employment, level of government regulation and the ease of doing business. Competitiveness effects international trade because the more competitive countries will tend to attain a higher level of global trade.

Tariffs and Trade Barriers

Sometimes governments enact trade barriers to limit trade with foreign countries. Sometimes these can take the form of quotas, where only a limited amount of a certain product or service can be purchased from businesses in foreign countries. Tariffs have been a common trade barrier in history. A tariff is a tax paid on imported goods. Tariffs and other trade barriers effect international trade by reducing it.

Globalization

Globalization is the term used to describe a general tendency for national economies to become more integrated with each other. This happens because of a combination of advanced communication technologies, logistic technologies, increased capital flows and reduction of trade barriers by national governments. Globalization is a general trend that has caused an increase in international trade over the last three or four decades.

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