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1. Unit 1: Introduction

2. Trade
Meaning:
• Trade is the voluntary exchange of goods or services between
different economic actors.
• Since the parties are under no obligation to trade, a transaction will
only occur if both parties consider it beneficial to their interests.
•

4. Concept of internal
• The goods produced in a country may be sold within the country .
• When buying and selling of goods and services takes place within the
geographical boundaries of a country, it is referred to as internal
trade. It may take place between buyers and sellers in the same
locality, village, town or city; or may be in different states, but
definitely within the same country. .
• It is also called domestic trade or home trade.

5. Features of Internal Trade
• The buying and selling of goods take place within the boundaries of
the same country.
• Payment for goods and services is made in the currency of the home
country.
• It involves the transactions between the producers, consumers and the
middlemen.
• It consists of a distribution network of middlemen and agencies
engaged in exchange of goods and services.

6. Concept of International Trade
• International trade is the purchase and sale of goods and services by
companies in different countries.
• Consumer goods, raw materials, food, and machinery all are bought
and sold in the international marketplace.

7. Features of International Trade
(1) Immobility of Factors:
(2) Heterogeneous Markets:
In the international economy, world markets lack homogeneity on account of differences in
climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of
international buyers in each case would, therefore, be different.
(3) Different National Groups:
International trade takes place between differently cohered groups. The socio-economic
environment differs greatly among different nations.
(4) Different Political Units:
International trade is a phenomenon which occurs amongst different political units.
(5) Different National Policies and Government Intervention:
Economic and political policies differ from one country to another. Policies pertaining to
trade, commerce, export and import, taxation, etc., also differ widely among countries though
they are more or less uniform within the country.
(6) Different Currencies:
Another notable feature of international trade is that it involves the use of different types of
currencies. So, each country has its own policy in regard to exchange rates and foreign
exchange.

8. Reasons Behind International trade
1. Human wants and countries’ resources do not totally coincide. Hence,
there tends to be interdependence on a large scale.
2. Factor endowments in different countries differ.
3. Technological advancement of different countries differs. Thus, some
countries are better placed in one kind of production and some others
superior in some other kind of production.
4. Labour and entrepreneurial skills differ in different countries.
5. Factors of production are highly immobile between countries.

9. Internal Trade International Trade
Definition
Internal trade is trade that involves buying and selling
taking place between two parties which are located
within the political and geographical boundaries of a
country
Exchange of currency is there between the two
countries/individuals/businesses involved in the trade
Trade Restrictions
No trade restrictions for internal trade International trade has different restrictions as the two
countries involved in trade have different policies with
regards to trade
Transportation Cost
Transportation cost is less when trade is taking place
within the borders of a country
Comparatively higher transportation costs as goods
need to be transported across the world
Goods traded
Only those goods and services are traded that are
available in the country
Helps countries to trade goods that are produced in
surplus or purchase goods that are scarcely available
Foreign reserve
Does not generate any foreign reserve International trade generates foreign reserves for the

10. Free Trade System
• Free trade, also called laissez-faire, a policy by which a government does not discriminate
against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports).
• Free trade is international trade without restrictions. Free trade reduces barriers to imports and
exports of goods and services such as tariffs, quotas, subsidies, embargoes, and product standard
regulations between member countries.
• To create a free trade area, members sign a free trade agreement. However, contrary to a customs
union, here each country determines its own restrictions on trade with non-member countries.
• - EFTA (European Free Trade Association): a free trade agreement between Norway, Iceland,
Switzerland, and Liechtenstein.
• - NAFTA (North American Free Trade Agreement): a free trade agreement between the United
States, Mexico, and Canada.
• - New Zealand-China Free Trade Agreement: a free trade agreement between China and New
Zealand.
• An organisation that highly contributed to the development of free trade is the World Trade
Organisation (WTO). The WTO is an international organisation that aims to open trade for the
benefit of all.
• The WTO provides a forum for negotiating agreements aimed at reducing obstacles to
international trade and ensuring a level playing field for all, thus contributing to economic growth
and development.
• - World Trade Organisation

11. Merits of Free Trade Policy
1. Economies of scale:
Free trade allows an expansion that is associated with increased output. The
increased output, however, leads to the decrease in average production cost per
unit which is called economies of scale.
2. Increased competition:
Free trade allows enterprises to compete on a global scale. This is associated with
increased competition that contributes to products' improvement and lower prices
for customers.
3. Specialisation:
Free trade allows countries to exchange products and specialise in the production
of a narrow range of goods or services to increase their efficiency.
4. Reduction of monopolies:
Free trade highly contributes to breaking up domestic monopolies. It allows
international trade, which creates a market where many producers exist and
compete with each other.

12. 5. Benefits to international consumers:
Under this policy every country specializes in production and exchange of
those goods which can be produced at comparative low cost. As a result,
international consumers would be able to consume any types goods having
high quality at low price.
6. Gain of Technology:
Industrial development requires advance technology. Developing countries
are backward in technological improvement. Free trade policy will help to
import suitable technology from foreign countries.
7. Increase in Production

13. Demerits of Free Trade System
1. Market dominants:
In order to increase the market share some world-leading traders dominate the market. In
doing so, they do not allow any other traders to enter and develop in the market. This is
particularly a threat to developing countries.
2. Collapse of home industries:
When products are imported freely, they are very likely to dominate the home markets of
other countries. This poses a threat to small businesses, especially those in developing
countries.
3. High dependence:
Many countries do not manufacture their own products and simply rely on importing
foreign goods and services instead. That situation poses a threat to those countries as in case
of any conflicts or war, they might be deprived of the products they need.
4. Dumping:
Free trade policy creates cut throat competition among the producers. It leads towards sale
of products at a lower price than the cost in the foreign country. It is called dumping.

14. 4. Import of Harmful goods:
Free trade policy encourages exchanging all kinds of goods without any restriction.
It is possible to import harmful commodities in the country.
5. Exhaustion of natural resources:
In the developing countries industries are not well developed. Therefore, there is
possibility of export of natural resources in the form of raw materials.
6. Economic crisis:
Under the free trade policy, if there arises situation of inflation, depression, etc, in
a country, it spreads like an epidemic and infections disease all over the world.
7. Reduction of savings and investment:
Under this policy, the volume of imports of foreign goods increases even in the
poor countries. It makes the people of the poor countries habitual to consume the
unnecessary and luxurious goods. It reduces the saving and investment.

15. Protection Trade System
• Trade protectionism, is the economic policy of restricting imports
from other countries through methods such as tariffs on imported
goods, import quotas, and a variety of other government regulations.
• In other words, the protection is that policy under which the
government makes the partial or whole control on the import of the
foreign products for the development and expansion of the industries
established in the country.
• The objective of protection is to safeguard the national industries
from the foreign competition.
• Proponents argue that protectionist policies shield the producers,
businesses, and workers of the import-competing sector in the
country from foreign competitors.

16. Methods of Protection

17. Merits of Protection Trade System
1. Need for protecting infant industries:
Industries of developing countries are in infant stage. They can’t compete with
industries of developed nation. Protection trade policy gives the protection to the
domestic industry to enhance the competitiveness.
2. Diversification of industries:
Dependence on few domestic industries will not be reliable for a country. It is
because, foreign goods may not be imported due to the economic or political
disturbances occurred in foreign market. Therefore it is argued that a country should
diversify its industries by providing protection.
3. More jobs:
Higher employment rates result when domestic firms boost their workforce.
4. Higher GDP:
Protectionist policies tend to boost the economy’s GDP due to a rise in domestic
production

18. 5. Correction of deficit balance of trade:
If value of import is more than the value of export, it causes deficit balance
of trade. Protection trade policy is the best tool to correct the deficit balance
of trade by imposing higher tariff, quota, providing export subsidy, etc.
6. National defence:
Dependency upon foreign companies for the of defence materials like bullet,
gun, etc may be harmful for the countries. Because, if any dispute occurs
between the countries, import becomes impossible. Therefore, such
materials should be produced by adopting protection trade.
7. Lower imports:
Protectionist policies help reduce import levels and allow the country to
increase its trade balance.
8. Self-dependent:

19. Composition of Nepalese Foreign Trade
• It refers to the real situation of export and import of commodities
within one year period time from Nepal to the other foreign
countries.
• In other words under it, there is analyzed what kinds of commodities
are exported and imported.
• In general developing countries mainly exports primary goods and
imports finished goods.
• Nepal as agro based country exports agro products in India and other
nations and imports mainly finished and semi-finished goods as well
as machinery, equipment, petroleum products etc.
• Items of export and import are categorized under the ten groups by
Standard International Trade Classification (SITC).

20. Items Year 2019/20 Year 2020/21 Year 2021/22
(first 8th month)
Export
(9770.9)
Import
(119679.9)
Export
(14112.4)
Import
(153983.7)
Export
(14774.6)
Import
(130873.5)
Foods and live animals 1844.6 16638.7 2590.4 21379.1 1813.2 15699.2
Tobacco and Beverages 18.5 641.1 24.8 551.8 21.6 428.2
Crude materials and inedible goods 189.2 4446.6 275.3 5285.1 175.8 4451.3
Mineral Fuels and Lubricants 0.0 19477.2 0.0 21438.8 0.0 21729.7
Animals and Vegetables Oils and
Fats
3119.7 4934.3 5595.9 8159.5 8038.4 9395.4
Chemicals and drugs 401.9 13417.6 588.1 17980.9 436.4 15536.6
Classified manufactured goods 3102.6 24164.6 3725.9 32720.6 3209.6 25434.1
Transport and machinery
equipment
93.7 26434.3 84.2 33535.4 24.3 26836.9
Miscellaneous Manufactured goods 1000.8 8161.6 1227.7 10183.9 1054.8 8062.0
Not classified goods 0.0 1364.0 0.1 2748.6 0.4 3300.2
(Rs. In 10 million)

21. Direction of Foreign Trade of Nepal
• In the past Nepalese foreign trade was only limited with India and Tibet.
Out of the total trade, 95% trade was limited with India and rest of the trade
was with Tibet.
• The reason behind the large volume of trade with India was due to the long
and open boarder, traditional, cultural and historical relationship between
Nepal and India.
• At recent years, foreign trade of Nepal is going to spray in other countries.
Nepalese products have been exporting in India, China, America, Japan,
Bangladesh, England, France, Italy, Belgium, Spain and so on. Similarly,
Nepal has been importing commodities from India, China, Singapore,
Ukraine, England, Thailand, Japan, Malesia, UAE and so on.