1. Geographical specialization:
Foreign trade enables each country to specialise in the production of those goods and services for which it has the greatest relative advantages in comparison with other countries.
Such geographical specialisation helps to improve the productivity and quality of goods and services. It also leads to lower cost of production.
2. Optimum use of resources:
Foreign trade helps each country to make optimum use of its national resources. Each country can concentrate on production of those goods for which its resources are best suited. It can exchange its surplus for those goods which it is not suited to produce. In this way wastage of resources is avoided.
3. Economic development:
Foreign trade enables developing countries like India to import machinery, equipment and technology for rapid industrialisation.
With the help of advanced technology and capital goods from abroad an underdeveloped country can use its natural resources and increase rate of growth. Japan, United Kingdom and USA have achieved remarkable economic progress through imports of raw materials and exports of manufactured goods.
A country can earn valuable foreign exchange through exports. Foreign trade also increases income of government in the form of customs duty.
4. Economies of scale:
Foreign trade helps each country to produce not only for home consumption but for export to other countries also. It creates a very wide market for the surplus output of a country.
Every country can sell its surplus goods in foreign markets. This leads to large scale production which provides several advantages.
5. Generation of employment:
Foreign trade generates employment opportunities by assisting the expansion and growth of agricultural and industrial activities. It also offers direct employment to a large number of intermediaries employed in export and import trade.
6. Higher standard of living:
Through foreign trade every country can obtain the goods and services which are not produced within the country. Citizens of a country can enjoy a more variety of goods and services. Therefore, exchange of goods and services between countries leads to a higher standard of living for all.
7. Price equalization:
Foreign trade helps to equalize prices of commodities throughout the world markets after making allowance for transport and customs duties. Whenever the price of a commodity tends to rise in a country, imports can be increased to check the rise in prices.
Similarly, whenever prices of a commodity decline sharply, the commodity can be exported in larger quantities to check the fall in prices. In this way violent fluctuations in prices can be reduced.
8. Security from famine:
Natural calamities such as famine, flood, earthquakes, etc. may affect the production of goods in a country. Deficiency in supply of essential commodities in the country can be met by imports from other countries. Foreign trade can protect a country from starvation. Food and medicines can be imported from other countries during emergent conditions.
9. International brotherhood:
Through foreign trade people of different countries come in contact with each other. There is exchange of culture and ideas and mutual understanding. Foreign trade, therefore, contributes to international cooperation and peace.
It develops cultural and social relations, in addition to business relations, between people belonging to different countries.
10. Development of transportation and communication:
Foreign trade requires the best means of transportation and communication. It causes development of modern means of transportation and communication.