Need for International Trade
The type of trade with which most people are familiar is retail trade, in which shopkeepers sell goods to individual consumers for money. If it is done on a large scale it is called wholesale trade, in which factories or producers sell the goods to wholesalers, who in turn sell them to shopkeepers or retailers. The exchange of goods and services between different regions within a country is referred to as internal trade. Thus, international trade refers to the trade or exchange of goods and services between two or more countries.
No country can be completely self sufficient, and trade between countries is therefore essential to ensure a supply of a country's needs. Moreover, it enables the people to enjoy those goods and services which they cannot produce themselves or which they can produce at a relatively high cost.
There is unequal distribution of productive resources by the nature on the surface of the earth. Countries differ in respect of climatic conditions, availability of cultivable land, forests, mines, mineral products, labour, capital technology and entrepreneurial skills etc. Given their diversities, no country has the potential to produce all the commodities at the least cost.
Just as there is division of labour in the case of individuals, the countries also adopt this principle at the international level. Each one of them specializes in the production of only such commodities, which they can produce at comparatively lower cost than the others. They export such products to others and in return import those products in the production, of which they have comparative cost disadvantage. The existence of cost differences create price differential among the various countries.