Effects of International Trade on Domestic Markets

International trade is the exchange of services and goods between countries. International trade enables a country to expand its markets as well as access to goods and services that may not be available domestically (Khussainova, Zhartay & Gazizova, 2016). Trading globally offers the countries and consumers a chance to access services and goods that are unavailable in their own states and which might be costly in the domestic market. Opening up trade to international trade affects the domestic markets both positively and negatively. This paper will focus on some of the effects of opening up to international trade on domestic markets.

Supply and Demand for the Particular Good

International trades lead to an increase in exports and imports of services and goods within a domestic market. International trade leads to a broader market for domestic goods and services. Therefore, there is an increase in the supply for exports since domestic companies can access broader markets (Krolikowski & McCallum, 2018). This means that exports for domestic firms will increase since the producers are selling and producing more to the foreign market to capture the market share within the international market. On the other hand, there is an growth in the request for imports since foreign products and services attract domestic consumers. For instance, cheaper imports will lead to increased demand among consumers. The domestic market will be open to foreign producers who will be encouraged to produce more, thus raising the supply.

The Competitiveness of That Good’s Market

As the domestic market opens up for international trade, there is an increase in imports. An increase in imports leads to an increase in the number of goods and services that the domestic consumer can choose from (Krolikowski & McCallum, 2018). Therefore, the competitiveness of an import within international trade increases due to broader markets. For instance, imported goods with lower prices will be preferred in the market compared to the domestic good. On the other hand, there will be a decrease in the competitiveness of domestic products due to increased competition in the market.

The competitiveness for exports will increase in international trade due to their comparative advantage in the foreign markets. There will be a rise in competitiveness for export goods in the international market since international trade will offer broad access to foreign markets with less competitive products and services. Ideally, international trade allows nations to expand their access to services and goods as well as markets. As a result, international trade enables both the export and import goods to be more competitive and with competitive pricing.

Competitiveness affects the equilibrium price and quantity.

International trades lead to competitiveness in the domestic market due to changes in the supply and demand of products in the market. The equilibrium price and quantity are affected by the changes in competitiveness due to a shift in demand and supply in the market. As the imports increase in the domestic market due to international trade, the demand for domestic goods and services will decline. For instance, more competitive imports will reduce the demand for domestic products. Therefore, the domestic market will experience a decrease in equilibrium price and quantity of the goods. For the export goods, there will be an increase in exports to the domestic market as well as demand for the goods and services exported. Therefore, there will be a surge in the equilibrium price and quantity of the commodities and services.

 

Domestic Monopoly

International trade leads to competition for domestic monopolies due to an increase in imported goods. More competition from abroad may prevent domestic monopolies from putting very high prices on goods and services. Therefore, when a domestic market gets involved in international trade, domestic monopolies are greatly affected. The single sellers catering for the domestic market are affected by the competition from the foreign producers. According to Game theory, the monopolist will be required to develop strategies with references to the strategies of the international seller (Kandori & Ui, 2020). A single competitor in the domestic market changes the market structure from monopolistic to oligopoly structure. This is because more than one seller is offering an identical product.

Ideally, according to game theory, monopoly is a game with a single-player, while an oligopoly market is a game with two players (Kandori & Ui, 2020). This means with a single competitor in the domestic market; there will be a mutual interdependence in the firms. The actions one firm will affect the decisions of the other firm. For instance, assuming that there are two identical firms, Firm A and Firm B, each of them will simultaneously select their quantity level, which will affect the demand-supply in the market. This makes the monopolist sell a certain amount at a specific price, which leads to features of perfect competition. Therefore, the monopolist become dependent on the decisions of the international seller. For instance, if the international seller offers identical products at a lower price, the monopolist will be demanded to lower their price to remain relevant in the market.

 

 

References

Borkakoti, J. (2017). International trade: causes and consequences. Macmillan International Higher Education.

Kandori, M., & Ui, T. (2020). Introduction to fundamental issues in game theory and market design. The Japanese Economic Review71(1), 1-5.

Khussainova, Z. S., Zhartay, Z. M., & Gazizova, M. R. (2016). International Trade and World Goods Markets: The textbook.

Krolikowski, P. M., & McCallum, A. H. (2018). Goods-market frictions and international trade.

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