External Trade: Meaning, Objectives, Types and Importance of External Trade (For CBSE, ICSE, IAS, NET, NRA 2022)

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With the development of human society and progress in science and technology, the scope of trade has also widened. It has now crossed the geographical boundaries of each country. Today, we can buy goods of our need from other countries and also sell our surplus goods abroad without facing much difficulty. When the business firms of two different countries participate in the process of buying and selling of goods it is termed as External Trade.

External Trade – Meaning

No country in the world possesses everything that is needed by its people. So, they all have to depend on others to meet their requirement of certain items. For example, a country may be rich in iron and steel but poor in aluminium. So, it has to meets requirement of aluminium from countries with surplus production of aluminium. Not only that, the countries having excess production of certain items find it beneficial to sell them to some other countries and buy items in which they are deficient from others. It is also observed that some countries attain specialisation in production of certain products by virtue of adopting advanced technology while others find it difficult or expensive to produce it in their own country. They prefer to buy those products from the former. Thus, uneven distribution of natural resources and specialisation attained in production of certain items give rise to exchange of goods and services between different countries. Such exchange is termed as “External Trade” . It is also known as Foreign Trade or International Trade.


After studying this lesson, you will be able to:

  • Define the term ′ external trade.
  • Describe the importance of external trade.
  • Identify the different types of external trade.
  • Explain the various difficulties faced in external trade.
  • State the various documents used in external trade.
  • Explain the procedure for import and export of goods; and
  • Describe the various export promotion measures undertaken by the government.

Types of External Trade

On the basis of sale and purchase of goods and services, external trade can be divided into three kinds. They are:

Types of External Trade

Import Trade

When the business firm of a country purchases goods from the firm of another country, it is called Import trade. For example, when India Govt. purchases petroleum products, electronic goods, gold, machineries, etc. , from other countries it is termed as import trade.

Export Trade

When the firm of a country sells goods to a firm of another country, it is called Export trade. For example, the sale of iron and steel, tea, coffee, coal, etc. by Indian companies to other countries is known as its export trade.

Entrepot Trade

When the firm of a country imports goods for the purpose of exporting the same to the firms of some other country with or without making any change, it is known as entrepot trade or re-export trade for that country. For example, if an Indian company imports rubber from Thailand and exports it to Japan then it is called Entrepot trade for India. Let us see what the possible reasons for this could be. A country cannot import goods directly from others because of the following reasons:

  • The exporting country may not have any accessible trade routes connecting the importing country; or
  • The goods imported may require processing or finishing before exporting. And these facilities may be lacking in the exporting or importing countries.
  • There may not be any trade agreement between both the countries.

Importance of External Trade

External Trade is an important indicator of economic condition of a nation. Both importing and exporting countries are benefited by external trade. While exporting country earns more foreign exchange by exporting its surplus, the importing country at the same time gets the opportunity to use better products and raise the standard of living of its people. Let us discuss in detail about the importance of external trade.

Importance of External Trade

Promotes Specialisation

External trade promotes specialisation. When there is expansion in the demand for a particular commodity, its producer is encouraged to specialise in its production. For example, there is demand of Japanese electronic goods all over the world. The result is that Japan՚s efficacy in this field has developed enormously. Similarly, our country has specialised in tea, coffee and sugar production.

Improves Standard of Living

On account of import trade, a country can consume goods, which it does not produce. On the other hand, it earns foreign exchange through export trade. The import and export trade thus, help in raising standard of living of a country.

Enhances Competition

External trade enhances competition, which compels the domestic firms to improve technology of production, production process and quality of the products. It ultimately benefits the consumers in getting better quality products at competitive prices. It also provides a large variety of goods.

Generates Employment Opportunities

External trade facilitates the growth of agricultural, commercial as well as industrial activities, which in turn generates more and more employment opportunities for the people.

Price Equalisation

External trade leads to equalisation of prices of goods and commodities in the world. Whenever the prices of commodities tend to rise because of short supply it can be checked by importing more goods. Similarly, when the prices of products decline because of availability of excessive item, the country may export that surplus to others.

International Relation

External trade brings the people of two different countries to come closer and to understand the need and requirement of each other. They also participate in various trade and cultural exhibitions. All these activities promote harmonious and cordial relationship among the nations.

Economic growth

Economic growth of every country depends to a large extend on the volume of external trade. If a country specialises in any product, it needs to produce more to meet the worldwide demand. So, by producing and exporting more goods and services it can accelerate the economic growth of the country.

Proper utilisation of natural resources

External trade is a means through which the natural resources of various countries can be properly utilised. For example, a country may be rich in minerals but due to lack of technological advancement it is not able to extract those minerals from the earth.

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