Trade is the most important factor in international economic relations. It consists of two elements: a) merchandise trade and
b) Trade in services. The components of merchandise trade are exports and imports of manufactured goods. Another important
component of international trade is the trade in services. Services generally, include the items like wholesale and retail trade,
restaurants and hotels, transport and communication, financial services etc.

Principal Characteristics of International Trade
International trade plays an important role in the economic development of any country and it is considered as an 'engine of growth'. Following are the important characteristics of the international trade.

1. International Competition: One of the important features of international trade that producers from many countries compete with one another to sell their products. The competition is very intense and the quality, design, packing, price, advertising etc. all play a very important role in deciding who will be able to sell his product.

2. Separation of Producers from buyers: With increasing specialization and division of labour, the gap between the producers and the buyers has increased.

3. Selection of Mutually Acceptable Currency: The currencies of the exporting and importing countries are different.
Therefore, a mutually acceptable currency has to be found out. Normally this currency is dollar or pound sterling. These currencies are known as hard currencies and acceptable all over the world.

4. Price equalization and equalization of factor Prices: International trade tends to equalize prices of all goods all over the world at the same time it leads to equalization of factor prices like the prices of labour, capital and other factors of production.

5. Protection vs. Free Trade: Free trade implies free and unrestricted flow of goods and services while protectionism refers to restrictions imposed by states on freedom of trade. Sometimes these restrictions are imposed to safeguard the domestic industries. Free trade is good from an international viewpoint but protection. The adoption of the policy of protection leads the countries to employ a plethora of import
duties, import quotas, export subsidies, export incentives etc. in India, for instance, import duties have been levied to a number of commodities to protect the domestic industries.

6. Adam Smith's theory of Absolute Advantage of Trade: Even country gains by trading. This theory of Adam Smith can be understood by an example: the tailor does not make his own shoes; he exchanges a suit for shoes. Thereby both the shoemaker and t he tailor gain. In the same manner Smith argued the whole country can gain by trading with other
country.

7. David Ricardo's theory of comparative advantage: To understand about comparative advantage there must be at
least two countries and two goods. We compare the opportunity costs of the production of each good in both countries. As long as the two countries opportunity costs for one good differ, one country has a comparative advent age in the product ion of other good. As long as this is the case both
countries will gain from trade, regardless of the fact that one of the countries might have an absolute disadvantage in both lines of production.

Trade offers each country the possibility of specialising in the line of it s comparative advantage and then exchange these products
for those in which she has a comparative disadvantage. Both countries can reallocate their factors of production to the line where
their comparative advantage lies and then export this product and import other products. In, nutshell, with a given amount of resources each country can consume more by trading than in isolation.

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