International trade is the exchange of goods and services between people, firms and governments in different countries. Before studying its advantages, theories, barriers and institutions, a learner must understand the basic terms used throughout this chapter. Clear definitions allow a trader, banker or policy maker to read trade statistics, follow news on exchange rates and discuss agreements with confidence. Example: an exporter at a tea cooperative who understands the terms exports, foreign exchange and balance of trade can follow how a sale to a buyer abroad affects the country's earnings.
International trade is the buying and selling of goods and services across national borders. It arises because countries differ in resources, climate, skills and technology, so no country can efficiently produce everything its people need. Example: Kenya sells tea, coffee and cut flowers to foreign buyers and buys machinery, fuel and vehicles from other countries.
Exports are goods and services produced in one country and sold to buyers in another. They bring foreign currency into the country and support local jobs and incomes. Example: a flower farm near Naivasha that sells roses to a buyer in the Netherlands earns euros, which it converts to shillings through a commercial bank.
Imports are goods and services bought from other countries for use at home. They supply items the country cannot produce, or cannot produce cheaply, and they use up foreign currency. Example: a hospital that buys diagnostic equipment from Germany is importing, and it must pay in foreign currency.
Re-exports are imported goods that are sent on to another country with little or no processing. Entrepot trade is the business of importing goods mainly to re-export them, and it is common in countries with good ports. Example: goods landed at Mombasa port and sent on to Uganda, Rwanda and South Sudan are transit and re-export trade that earns the country handling and transport fees.
Visible items are tangible goods that pass through customs, while invisible items are services and income flows that do not. Both matter, because a country may run a deficit in goods but a surplus in services. Example: tourism earnings and money sent home by Kenyans working abroad are invisible receipts that help to offset the cost of imported fuel.
Foreign exchange is the currency of another country, and the system by which currencies are bought and sold. Because each country uses its own money, a trader must convert currencies before buying or selling abroad.
Example: an importer must pay USD 2,000 to a supplier when the exchange rate is Ksh 130 per USD.
Formula: amount in shillings = amount in foreign currency × exchange rate
Substitution: amount = 2,000 × 130
Working: 2,000 × 130 = 260,000
Result: amount = Ksh 260,000
The exchange rate is the price of one currency in terms of another. When the shilling falls in value, imports become costlier and exports cheaper to foreign buyers, and when it rises, the reverse occurs. The detailed systems are treated in a later topic.
The balance of trade is the difference between the value of a country's visible exports and visible imports over a period. It is a surplus when exports exceed imports and a deficit when imports exceed exports. Example: if a country exports goods worth Ksh 900 billion and imports goods worth Ksh 1,600 billion, it has a trade deficit.
Formula: balance of trade = value of exports − value of imports
Substitution: balance = 900 − 1,600
Result: balance of trade = −Ksh 700 billion (a deficit)
The balance of payments is a record of all the money that flows into and out of a country in a given period as a result of trade, services, income transfers and capital movements. It is wider than the balance of trade because it includes services, remittances, loans and investments.
The terms of trade show how many imports a country can obtain for a given quantity of its exports. It is measured by comparing the prices of what the country sells with the prices of what it buys.
Formula: terms of trade = (index of export prices ÷ index of import prices) × 100
Example: export prices have risen to 120 and import prices to 150.
Substitution: terms of trade = (120 ÷ 150) × 100
Working: 0.8 × 100 = 80
Result: terms of trade = 80, which means the terms have worsened, since each unit of exports now buys fewer imports.
Free trade is trade between countries without barriers such as high taxes or quotas on imports. Protectionism is the use of such barriers to shield local producers from foreign competition. Example: a government that taxes imported sugar heavily to protect local sugar millers is practising protectionism, while one that allows sugar to enter duty-free is following free trade.
A trade barrier is any measure that restricts the flow of goods and services across borders. The common forms are named here and are discussed in detail in a later topic.
Absolute advantage is the ability of a country to produce a good using fewer resources than another country, while comparative advantage is the ability to produce it at a lower opportunity cost. These ideas explain why countries specialise and trade, and their theories are explained in a later topic. Example: a country that can grow tea cheaply but can produce computers only by giving up large amounts of other output will specialise in tea and import computers.
Economic integration is the joining of the economies of two or more countries through agreements that reduce or remove trade barriers between them. Example: Kenya is a member of the East African Community, which allows goods to move between member states with lower duties.
Globalisation is the growing connection of the world's economies through trade, finance, technology and the movement of people and ideas. It makes it easier for a small firm to sell abroad but also exposes local producers to foreign competition. Example: a county craft cooperative can sell baskets to customers overseas through an online platform, but it also faces competition from cheap imports.
A deficit occurs when a country spends more foreign currency than it earns, so that it must borrow or use reserves. A surplus occurs when it earns more than it spends, so that its reserves grow. Persistent deficits weaken the currency and raise debt, while persistent surpluses may signal an undervalued currency or low imports. Example: a country that earns less from exports and remittances than it pays for imports and debt must draw down its foreign exchange reserves.
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