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Internal Trade vs. External Trade

Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

When we think of trade, we often think of international trade. However, trade happens even within a country's borders. This lesson will analyze the differences between internal and external trade, and examine the advantages and disadvantages of international trade.

External and Internal Trade

If one company in India trades with another company in India, this trade is internal. However, trade that occurs between India and Australia, would be external trade. This is also called international trade. Let's highlight some of the features between internal and external trade. The following table covers the concepts in depth. In order to help you visualize the concepts, we will use India when describing internal trade, and we'll use its trade with Australia for external trade discussion:

Topic Internal External
Goods/services Produced and sold in India Produced in India and sold in Australia; produced in Australia and sold in India
Goods/services Not traded externally; Demand and distribution remains in India Goods demanded by Australia are traded to Australia
Value of Goods Stated in Indian Rupees Value is determined by exchange rate (Rupee and Australian Dollar)
Capital Land, labor and capital can be moved around Cannot be moved easily to external countries (hence external trade)

India is a big player when it comes to international trade. Let's take a look at some advantages and disadvantages of international trade.

Advantages and Disadvantages of International Trade

The whole point of international trade is to get something you need, and trade away something you don't need (or an excess). For example, if Australia has excess bauxite and India has an excess of jute, the two nations can trade.

Advantages Disadvantages
Sharing of resources Natural resource depletion
Diversity of products Decline of domestic industry
Promotes the Global Village Loss of/promotion of cultural identities
Jobs/Employment Government control of workforce
Investment opportunity Control of resources
New technology Social welfare issues

Advantages

Trade brings with it a great many benefits, but also some drawbacks. From an economic standpoint, international trade brings the opportunity for new jobs, new technology, new investments (both from Indian and foreign investors), and the influx of new products and services to India (and to the countries India trades with).

Trade also helps build the Global Village; that is, we can connect India with far away countries like Denmark or Belgium, not just the big boys of Japan, Australia and the US.

Let's say an Indian manufacturer has done all they can to trade within India's borders (internal trade); they still are able to produce their product, but don't have any new markets. International trade can be a viable option to increase their market reach; not only does the company find new markets, but they can also gain in a new influx of goods/services into India.

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