Brief notes on the Need for a Separate Theory of International Trade



Economists are divided on the question whether international trade should have a separate theory or not. The classical economists are of the view that international trade differs fundamently from internal trade and therefore a separate theory to explain international trade is necessary. The main differences between international trade and internal trade which lead to the need for a separate theory of international trade are as follows:

1. Difference in Factor Mobility:

The main difference between internal and international trade is that the factors of production like labour and capital are comparatively more mobile (though not perfectly mobile as the classical economists believed) within the country and comparatively less mobile (though not perfectly immobile as the classical economists believed) between the countries.

Within the country, the factors of production tend to move out of those areas where their prices are low to those areas where prices are high. Thus, factor mobility within the country results in the equalization of factor prices.

At the international level, on the other hand, the mobility of factors of production is restricted due to the factors like (a) high travelling expenses, immigration-laws, citizenship qualifications, etc. : (b) differences in climate, living conditions, language, culture : (c) racial, religious discriminations.

The relative factor immobility between the countries necessitates a separate theory of international trade.

2. Different Currencies:

Another reason for a separate theory of international trade is the use of different currencies in different countries. Even if the names of the currencies of some countries may be the same, the internal purchasing power and the systems of issue are different.

Moreover, different foreign exchange policies are adopted by different countries. Rates of exchange i.e., the prices of acquiring various currencies differ as a result of these foreign exchange policies. In fact, it is the difference in the foreign exchange policies rather than the existence of different national money which distinguishes international from domestic trade.

3. Different National Policies:

Difference in the national policies of different countries also leads to the necessity of a separate theory of international trade. Different countries follow different national policies relating to commerce, trade, taxation, industry, etc.

These policies are more or less uniform within the country but vary between countries. Therefore, they affect the domestic trade uniformly, but influence the interna­tional trade differently. Policies like tariffs, import quotas, subsidies, etc. interfere with the free and normal movement of goods between the countries.

4. Different Exchange Control Policies:

Another reason for a separate theory of international trade is different exchange control policies adopted by different countries. There are built-in stabilizers in the inter-regional, and not the international, monetary flows.

If certain region in a country suffers from depres­sion, people there will not be able to pay taxes and will receive more investment and subsidies from the government. But, no such automatic system of monetary adjustment exists at the international level.

Different countries facing different degrees of inflationary and deflationary situations adopt different degrees of inflationary and deflationary situations adopt different exchange control policies, affecting the international trade differently.

5. Differences in Natural Resources:

Different countries have different geographical conditions and are endowed with different natural resources. Some countries have abundance of natural resources, while others have scarcity.

Again, certain types of natural resources are more abundant in some countries than in other countries. On account of these differences, the cost of producing the same good differs between countries. Different cost conditions make international trade possible and profitable which results in the emergence of a separate theory of international trade.

6. Different Political Groups:

The existence of different political groups in different countries also results in a separate theory of international trade. Internal trade occurs within the same political unit, while the international trade occurs between different political units.

The government of each country attempts to maximize the welfare of its own people against that of others. Therefore each country adopts such an international trade policy that promotes its own interest at the cost of that of the other countries.

7. Different Markets:

Separate theory of international trade is needed on account of the existence of different markets for different countries. Internal trade occurs in a homogeneous home market, while international trade occurs in heterogeneous world markets.

Heterogeneity of international markets is due to differences in climate, customs, language, habits, weights, measures, etc. As a result of these differences, goods which are traded within the country may not be traded in other countries.

For instance, Indians use left-hand driven cars, while Americans use right-hand driven cars. Thus, the markets for automobiles are separated internationally.