The Problems of Financing International Trade in Nigeria

The Problems of Financing International Trade in Nigeria

INTERNATIONAL TRADE THEORY

What is the essence of trade? Why do people and countries engage in trade between themselves? Why queue for foreign exchange. The theory formulated as far back  as 1815, is usually conceded with Richards. [widget id=”related-posts-by-taxonomy-2″]

The theory of comparative cost advantage is one of the oldest and still remains unchanged amongest economic theories. However, English classical economics has developed another theory classical economics has developed another theory, which is based on merchantilism. This was the bare of revolt between Adam Smith and Richards on English classical economics who was an off spring of liberalism and the enlightenment of the general philosophy that stressed the importance of individual and viewed the nation as nothing more than the sum of its inhibitants, for Smith and Richards, the supreme subject of economics was the consumers man laboured and produced in order to consume; and anything that could be consumed is worth labouring for.

STATEMENT OF THE THEORY

The theory of comparative cost is based on the difference in production cost of similar commodities in different countries due to differences in climate, Natural resources, geographical situation and efficiency labour, a country can produce one commodity at a lower cost than another. In this way, each country specializes in the production of that commodity in which its comparative cost of production is least. Therefore when a country enters into trade with some other countries, it will export those commodities in which its comparative cost are less and import those commodities in which its comparative productive cost are higher. This is the basis of trade as enunciated by Richards.From the above, it follows that each country will specialise in the production of those commodities in which it has greater comparative advantage or least comparative disadvantage. Thus, a country will export those commodities in which its comparative advantage is the least.

The Richardian doctrine of comparative cost is based on trade assumption. These assumptions are based on two extremes, countries and commodities. Richardo went further to explain the theory of international trade. He used three items factors:

1. Absolute
2. Equal

• Comparative item

1. i) ABSOLUTE DIFFERENCE IN COST

Suppose country A can produce 10x or 5y and B can produce 5x and 10y, then country A has absolute advantage in the production of x, while B has some in the production of commodity Y. This can be expressed further in ratio:

That is,       10x of A

5x of B

Cost ratio = 2

Adam Smith based on his theory of international trade on absolute difference in cost between two countries. But this basis of trade is not realistic because there are many countries (under – developed) of course, this is why Adam Smith theory of Absolute advantage is not realistic. Ricardo therefore emphasized on the comparative differences in cost.

ii) EQUAL DIFFERENCE IN COST

This arises when two commodities are produced in countries at the same cost differentials. Supposed country A can produce 10x and 5y and country B 8x and 4y. the cost ratio for producing x commodities cost ratio for x

10x of A

8x of B

Cost ratio for y             5y of A

4y of B

=       ⁵/₄

In this type of case, international trade is not possible in terms of gains. But could still be carried on for social religious and political reasons.

(iii)     COMPARATIVE DIFFERENCE IN COST

Comparative differences in cost occur when one country has an absolute advantage in the production of both commodities both a comparative advantage in the production of one commodity than the other. All these theories are quite necessary in trade issues and forms the basis for proper evaluation of various terms at which trade is to be carried out. Despite all these, there still exist a lot of impediments to freedom of international trade. Some of the measures that are used to restrict the importation of these includes:-

Tariff, Quota, Import licence, foreign exchange control, exchange rationing, Embergo, Devaluation etc. International trade is not without problems, most of which have affected the flow of trade and inherent investments.

According to Rita Mr. and Eugene Caster in international finance management, one of the major problems that the financial officer encounters in the international market is the fact that Nations have different currencies and that the relative value of these currencies are not always constant through time? The mechanics of the balance of payment is used in evaluating the changes in external position of a given country, and therefore the possible change in the value of its currency. The problem is, however that of not understanding the technical, ties of the balance of payment. There is also the problem of inability of forecasting the future value of currencies. The effects of exchange rate fluctuation is enormous. This necessitated exports and importers to use the spot rate. There is also the issue of random detertion and the insurgence of fundamental faces like differential rate of inflation, population and growth. More disturbing issues in trade include the following:

1. The existence of different levels of economy development and the desire for balanced development among the members of grouping.
2. Widely, varying sizes of resources of adjacent countries and the fear of the smaller and poorer countries of being swallowed by the bigger and richer countries.

• The predominant of foreign investors could favour certain countries (often the more developed) above others.

1. Political Nationalism which makes the transfer of power of decision to a grouping difficult.
2. The ambulant and bilateral relationship which exist among countries in trade.
3. Finally, there is the pursuit of differing political ideologies. All these problems have contributed in one way or the other to reduce the volume of trade in the world.

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This article was extracted from a Project Research Work Topic

“THE PROBLEMS OF FINANCING INTERNATIONAL TRADE IN NIGERIA”

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