International Trade, Factors That Stimulate

Topics: Globalization, International trade, Inflation Pages: 7 (2208 words) Published: December 3, 2010
International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. History of International Business

International business has been a major force in shaping borders and changing world history. The Roman Empire is credited with being the first major international trade. The Romans used the Pax Romana, or Roman peace, as a major stimulus. This ensured that merchants were able to travel safely and rapidly on roads built, maintained and protected by Roman legions and their affiliated troops. A common means of exchange (coinage) simplified business transactions and made them comparable throughout the empire. In addition, Rome developed a systematic law, central market locations through the founding of cities, and an effective communication system; all of which contributed to the functioning of the marketplace and a reduction of business uncertainty. As the empire prospered City-nations and tribes that were not part of the empire decided to join as allies, and paid tributes and taxes to gain from trade with the Romans. The decline of the Roman Empire coincided with the infighting that resulted in insecurity and decline of infrastructure. This reduced the general acceptability of the common coinage, effectively killing off trade. Later, the British Empire used effective international business policy, which provided for efficient transport intensive trade, and an insistence on open markets to develop international trade. More recently, the United States developed a world leadership position largely due to its championing of market-based business transactions in the Western world; broader flow of ideas, goods and services along national borders; and an encouragement of international communication and transportation. Factors Stimulating Growth of International Business

Stable Currency
Relative currency stability is imperative for International trade to take place as it inspires general confidence on the sides of both buyer and seller. Inflation has the following effects on businesses: i) Inflation would cause a hike in interest rates. For example, if a lender normally wants 5% to let someone else use the money for a while, and inflation is also 5%, then the lender will want 10%. This puts up business costs and makes borrowing less and therefore investment less; less investment means less growth and ultimately less business activity. ii) During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence. iii) When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be fewer sales for that country’s goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market. The Zimbabwe situation though extreme is a good example of how inflation of how inflation can bring a countries participation in trade, both local and international, to a halt. Below is an inflation curve showing the exponential rate of growth and the resultant reduction of GDP for the country....
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