International trade refers to exchanging goods, capital, and services across international territories or borders as there is a want or a need for services and or goods. In nations, international trade represents a part share of their gross domestic product (Gani, 2017). International trade has significant effects on domestic markets, especially regarding both the import and export of goods and services. According to comparative costs, international trade enables countries, organizations, and individuals to enjoy international specialization advantages. Therefore, this paper will discuss the impact of international trade on exported and imported goods based on demand, the competitiveness of the goods in the market, and how the change in competitiveness affects equilibrium price and quantities.
Impacts of International Trade on Demand of Export and Import Goods
The demand for goods keeps domestic markets functioning as it determines the quantity of goods produced, the variety of available goods, and the prices at which these goods are sold. International trade affects the demand for both export and import goods. Based on the demand model where multiple firms and various sellers offer goods sales, it would mean no that no firm or individuals can exert the influence of the prices. International trade affects the variety of goods provided by small businesses (Asteriou, Masatci, & Pılbeam, 2016). For instance, the cost of production in international markets is less than that of the domestic markets. Trade between the international market and domestic markets benefits the consumer as they save more money by accessing goods at lower prices than those at the domestic markets. Therefore, international trade encourages import as the demand for imported goods is higher than that of locally produced goods. On the other hand, international trade encourages specialization that leads to new markets local products, thus enabling them to produce more to meet the foreign markets’ demand. Therefore, international trade lowers goods’ prices, thus fuelling increased demand for import and export goods among consumers.
Impacts of International Trade on the Competitiveness of Export and Import Goods in the Market
International trade promotes the upgrading of import and export goods close to the global quality frontier, thus increasing competition. In terms of export goods, international trade forces domestic producers to improve the quality of their interests and lower the prices to compete with foreign markets. Import competition is measured using tariffs. According to De Loecker and Van Biesebroeck (2018), a firm intended to compete in the international markets needs to produce high-quality goods. The firms are forced to upgrade the quality of their interests. Additionally, international trade brings high-quality import goods at a lower price than domestic producers. This creates competition with local producers as consumers prefer high-quality goods at a lower price. As a result, local firms are forced to lower their goods’ prices and increase their quality. On the other hand, international trade opens markets for locally produced goods. However, local producers are forced to upgrade their products’ quality to meet international standards and compete in foreign markets.
How the Change in Competitiveness Affects Equilibrium Price and Quantity
The equilibrium price refers to the intersection of the demand and supply curves. Competitiveness affects the demand and supply of both export and import goods. According to O’Connor and Wilson (2020), when there is competition, markets reach equilibrium as the prices below equilibrium price and above equilibrium price lead to shortage and surplus, respectively. Increased competition would mean more import of goods, which would lead to surplus forcing vendors to lower their prices in order to clear out their inventory. On the other hand, increased export would reduce competition, thus creating a shortage of goods. Consequently, the vendors would raise the price of goods automatically to maximize on the higher demand. Notably, both cases would force the price of goods to converge toward price equilibrium that may be lower or higher than the original equilibrium price.
How Opening Up To Trade Affects a Domestic Monopoly
According to Gani (2017), international trade limits the domestic monopoly’s abusive power. A domestic monopoly charges a higher price than the international prices provided there is no price ceiling in the domestic market. When international trade is opened, the competitors bring high-quality goods and lower price than the monopolist. As a result, consumers shift to competitors forcing the monopolist to lower prices and increase their products’ quality to compete favorably with the competitors. This relationship is explained by game theory. The theory is a mathematic analysis that attempts to investigate the strategic interactions among different players. According to the theory, players are assumed to consider other players’ perceptions and positions when forming their strategies. Employing the game theory, the domestic monopolist would be forced to consider the competitors’ prices and quality when strategizing to counter them. Similarly, an additional competitor would lead to a market outcome similar to perfect competition. However, the different competitors must provide products with the same or better quality than the monopolist and at a lower price.