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.

  1. 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 India has specialised in tea, coffee and sugar production.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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. So it can import modern equipments and machineries from advanced countries and make proper utilisation of those natural resources.