1. Foreign Trade Defined
The definition of foreign trade is the export of all goods and services to foreign countries and the import
of all goods and services to the home country. You will probably find a lot of data on the website of the
Indian Government, especially the foreign affairs and economy departments.
To understand the role of foreign trade in the Indian economy, you have to understand the importance
of foreign trade for any country. I'll explain this with a simple example:
Imagine that there are only two countries in the world, India and Denmark. Both countries have 1 000
citizens. These citizens eat only bananas and drink only milk (let's say they only eat banana-milkshakes).
Each country needs 50 000 bananas and 50 000 litres of milk to feed it's population.
In India, the weather is good, the sun shines a lot so bananas grow easily. Therefore, one Indian can
produce 100 bananas per year. But India is also a dry country, so the cows in India don't produce much
milk. Therefore one Indian can only produce 50 liters of milk per year.
In Denmark, the weather isn't sunny, so bananas don't grow easily. Therefore, one Dane can only
produce 50 bananas per year. On the other hand is Denmark a perfect place for cows, because it is a
very green country. Therefore, one Dane can produce 100 litres of milk per year.
Let's suppose that their is no foreign trade in our two-country-world. Denmark will produce 50 000
litres of milk and will use 500 inhabitants to do this. The other 500 Danes will be used to produce
bananas, resulting in a production of 25 000 bananas (500 workers x 50 bananas per worker). So
Denmark will come 25 000 bananas short to feed it's population.
India will produce 50 000 bananas (using 500 workers) and 25 000 litres of milk (using the other 500
workers), and also India will not be able to feed it's population.
So without foreign trade, both countries will not be able to produce enough food for the population.

2. No suppose that there is foreign trade between India and Denmark. Now both countries can produce
the goods that they are best in, bananas for India and milk for Denmark.
The 1000 workers in India will be able to produce 100 000 bananas. They only need 50 000, so the other
50 000 will be exported to Denmark. The 1000 workers in Denmark will be able to produce 100 000 litres
of milk. They only need 50 000 litres, so the other 50 000 litres will be exported to India. As a result of
this foreign trade, both countries will have enough food to feed their population.
This example makes two things clear. One: foreign trade is for the benefit of all countries. Two: when
there is foreign trade, you will specialize in the production of those goods in which you have an
advantage to produce them.
Now let's focus on India. The role of foreign trade on the Indian economy is now easy to determine:
First of all, foreign trade has made India richer. Products which are difficult to produce for India
(engines, ...) can be imported, which is good for the Indian economy.
Second of all, and this is without doubt the biggest influence on the Indian economy, the rise of foreign
trade has forced India to specialise in the production of a few goods. These are mainly ores (the Indian
mines), foodproducts and cheap products that are easily built using cheap labour.
So India has been one of those countries which competes with other economies by producing
labourintensive products. This has had a great influence on Indian economy, because it implies a partial
shift from agriculture to industrial production.

3. Meaning and Scope of Foreign Trade
Meaning
Trade between two or more nations is called foreign trade or international trade. This involves the
exchange of goods and services between the citizens of two nations. when the citizens of one nation
exchange goods and services with the citizens of another nation, it is called foreign trade; for example,
India's trade with USA, Japan, France and Pakistan.
Foreign trade is also known as external trade.
Foreign trade transactions are classified under three categories:
Import Trade
Export Trade
Entrepot Trade.
Scope of Foreign Trade
The aim of foreign trade is to increase production and to raise the standard of living of the people.
Foreign trade helps citizens of one nation to consume and enjoy the possession of goods produced in
some other nation. There is a need of foreign trade due to the following reasons:
I. Uneven Distribution of Natural Resources:
Natural resources of the world are not evenly divided amongst the nations of the world. Different
countries of the world have different amount of natural resources and they differ with each other in
regard to climate, minerals and other factors. Some countries can produce more of sugar like Cuba,
some can produce more of cotton like Egypt, while there are some others which can produce more of
wheat like Argentina. But all these countries need sugar, cotton and wheat. So they have to depend
upon one another for the exchange of their surpluses with the goods is in short in their country and
hence the need for foreign trade is natural.

4. II. Division of Labour and Specialization:
Due to uneven distribution of natural resources, some countries are more suitable placed to produce
some goods more economically than other countries. But they are geographically at a disadvantageous
position to produce other goods. They specialize in the production of such goods in which they have
some natural advantage in the form of availability of raw material, labour, technical know-how, climatic
conditions, etc., and get other goods in exchange for these goods from other countries.
III. Differences in Economic Growth Rate:
There are many differences in the economic growth rates of different countries. Some countries are
developed, some are developing, while there are some other countries which are under-developed;
these under- developed and developing countries have to depend upon developed ones for financial
help, which ultimately encourages foreign trade.
IV. Theory of Comparative Cost:
According to the theory of comparative cost each country should concentrate on the production of
those goods for which it is best suited, taking into account its natural resources, climate, labour supply,
technical know-how and the level of development. Each country specializes in the production of those
goods which it can produce at the lowest cost as compared to other countries which leads to
international specialization and division of labour. This reduces the cost of production all over the world
and improves the standard of living of the people in various countries. Hence the theory of comparative
cost encourages foreign trade.