Difference between internal trade and external trade

Difference between Internal Trade and External Trade (Domestic and International Trade)

Goods manufactured in a country can be sold both within and outside of the country. Transactions done within a country are called internal trade whereas transactions across different countries are called external trade.

In this blog, a comparison between the two is made.

Meaning of Internal Trade

When goods and services are produced and sold within the geographical limits of a country, it is referred to as internal trade. It might take place between buyers and sellers in the same district, village, town, or city, or between buyers and sellers in different states, but within the same country.

Internal trade is also known as domestic or home trade.

Some of the features of Internal Trade are:

  • The buying and selling of goods take place within the borders of the same country.
  • Payment for goods and services is done in the currency of the home country.
  • It involves transactions between manufacturers, customers, and middlemen.
  • It involves a distribution network of middlemen and agencies that are engaged in the exchange of products and services. Middlemen are usually wholesalers and retailers that act as a link between the producers and consumers.

Types of Domestic Trade

Based on the volume of goods traded, internal trade can be classified into two categories:

1. Wholesale trade

Wholesale trade is the purchase of large quantities of goods from producers or manufacturers for resale to other dealers, traders, or buyers in small quantities. The individuals or businesses engaged in wholesale trade are known as wholesalers. They act as an intermediary between manufacturers or producers and small traders. In general, they specialize in one or a few products.

2. Retail trade

Buying goods from manufacturers or wholesalers and selling them to end users is referred to as retail trade. Those who are involved in retail trade are known as retailers. They typically deal in a wide variety of goods. Retailers sell goods in small amounts to meet the requirements of the customers. Also, a retailer has an indirect relationship with the manufacturer (through wholesalers) but a direct relationship with the customers.

Meaning of External Trade

The scope of trade has expanded in line with the development of human society and advancements in science and technology. It has now crossed the geographical boundaries of each country. Today, we can easily buy commodities from other countries which are deficient in our country and also sell our surplus goods abroad without much difficulty.

When businesses from two separate countries participate in the process of purchase and sale of goods, it is referred to as external trade.

Here, buying and selling of goods take place across the national boundaries of different countries. Hence, it is also known as Foreign Trade or International Trade.

Types of Foreign Trade

External trade can be divided into three types:

1. Import trade

Import trade is when a business firm of a country purchases products from a company located in another country. For example, when the Indian government buys petroleum products, electrical goods, gold, machinery, and so on from other countries, this is referred to as import trade.

2. Export trade

When a company in one country sells goods to a company in another country, it is known as export trade. For example, export trade refers to the sale of iron and steel, tea, coffee, coal, and other goods by Indian enterprises to other countries.

3. Entrepot trade

When a firm in one country imports goods with the intention of exporting them to the firms in some other country with or without further processing, the transaction is known as entrepot trade or re-export trade for that country. For example, if an Indian corporation imports rubber from Thailand and exports it to Japan, this is referred to as Entrepot trade for India.

What is the difference between internal trade and external trade?

Both internal trade and external trade are important. Internal trade facilitates the exchange of goods within the country and helps the economy of the country to grow.

Similarly, external trade is also a key measure of the economic health of a country. Both importing and exporting countries benefit from external trade. While the exporting country earns more foreign exchange by exporting its surplus, the importing country also gains the opportunity to employ better products and raise the standard of living for its people.

The main points of difference between the two are given as follows:

Internal TradeExternal Trade
Small distanceLong distance
Goods travel within a country (may be within the same district, locality, etc. or from one state to another).Except for neighboring countries, external trade involves the transportation of goods across long distances. It makes it harder for importers and exporters to develop a quick and close trade relationship.
Less riskHigher risk
Internal trade transactions have less risk as compared to international trade.External trade exposes goods to a greater degree of risk. The risk in transit of goods is enhanced due to long distances. For example, goods transported by ship may sink due to a storm. Although such risks may be covered through marine insurance, it then increases the cost of goods.
Transport and communication cost is lowTransport and communication cost is high
As goods move within the boundaries of a country, the cost of transportation of goods is low. Most of the time, goods are delivered by road.Long distances associated with external trade create challenges in transport and communication. It becomes quite costly. The loading and unloading of goods generally take a long time and require significant expenses that increase the cost of goods.
Fewer restrictionsMore restrictions
Internal trade has fewer restrictions.External trade is subject to many restrictions by way of customs, tariffs, quotas and exchange regulations.
Close contact between buyer and sellerLack of personal touch
As internal trade is the trade of goods within a country, buyers and sellers generally meet together and transactions are done at their convenience. But the situation is altogether different in the case of external trade. It normally involves a long procedure to buy and sell goods.Transactions in external trade are made with unknown people via correspondence and other modes of communication. The buyer and seller do not have any direct contact. So, the possibility of a dispute and bad debts is always present.
Less costOverall high cost
The availability of factors of production such as materials, machines and labor within the national boundaries of a country reduces the cost of goods when compared to external trade.Because of the high cost of transportation, insurance, intermediaries, and the cost of formalities to be completed, both import and export operations are costly.
Not affected by foreign exchangeFrequent price change
Only one currency is involved in internal trade. Thus, the price of a product is not affected by exchange rate fluctuations. Payments are made in home currency.The price of a product often changes in external trade due to variations in the foreign exchange rate, changes in import and export duties, and so on.
Need not study foreign marketsStudy of foreign markets
In internal trade, traders need not study the characteristics of foreign markets. They must do an extensive study of domestic markets only.To succeed in external trade, importers and exporters need to have a thorough understanding of the intensity of competition, buyers’ preferences, etc. in foreign markets.
Difference between Internal and External Trade

Hope the information is helpful!


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