Foreign Trade (Definition, Forms, Advantages & Disadvantages)

Definition of Foreign Trade

Foreign Trade is the buying and selling of goods and services between the people of one country and the other. For example, trade between Nigeria and America is called international or foreign trade.

Foreign Trade: This is the exchange of goods and services between two or more countries. It is otherwise known as International trade, for example, Nigeria purchases goods like automobiles and electronics from overseas countries and sells cocoa, palm oil, and rubber to other countries.

Forms of Foreign Trade

1. Bilateral Trade: This involves buying and selling between two countries e.g. a trade between Ghana and Nigeria, Japan and America etc.

2. Multilateral Trade: This involves buying and selling among many counties. It occurs when a country trades with as many countries as she wishes. For Instance, Nigeria has multilateral trade agreements with countries such as China, Russia, Holland and Britain.

Advantages of Foreign Trade

1. It enables a country to specialize in the production of goods and services in which she has a comparative (greater) advantage over her trading partner. The world’s total output increases as a result of this.

2. A country and its citizens enjoy an improved standard of living due to a variety of goods and services from other countries.

3. It leads to world peace.

4. Equilibrium is maintained in the balance of trade and balance of paymentsThe balance of payments (BoP) is a record of all economic transactions between a country and the rest of the world over a period of time. It's a tool used to... More positions.

5. It is an avenue to attract foreign investors to participate in establishing industries in the country.

6. Opportunity is created for a nation to acquire foreign technology, raw materials for economic and industrial development.

7. It increases employment opportunities as more jobs are created in industries and other sectors.

8. Foreign Trade helps to generate revenue both locally and abroad in the form of foreign exchange.

Disadvantages of Foreign Trade

1. Overdependence on foreign trade can cause unemployment 

2. It can bring adverse effects on a country’s balance of payments if its import is greater than exported goods and services.

3. The policy for country to be self sufficient may be reduced.

4. A country that solely depend on foreign made goods may suffer restriction or trade embargo as a result of wars or disagreement between nations.

5. It can make a country to be a dumping ground if not properly monitored and managed.