Need for a Separate Theory of International Trade

The classical school of economists like Adam Smith and David Ricardo held that there are certain fundamental difference between inter-regional or internal trade and inter-national trade, and so, there is a need for a separate theory of international trade, and they propounded a separate theory of international trade.

Modern economist like Bertil Ohlin and Heberles are of the view that international trade is just a special case of inter-regional or internal trade, and the differences between inter-regional and international trade are of degree rather than of kind, and so, these is no need for a separate theory of international trade.

The fundamental reasons which underline international trade and which emphasize the need for a separate theory of international trade are

a)    Difference in Natural Resources: Different countries are endowed with different types of natural resources. So, they specialize in the production of commodities for which they are richly endowed. The difference in natural resources between countries is not only responsible for international trade, but also emphasizes the need for a separate theory for international trade.

b)    Immobile Factors of Production: The factors of production, especially labour and capital are perfectly mobile within each country, but they are not perfectly mobile between countries. The immobility of factors of production between countries contribute to difference in factor prices and differences in costs of production in different countires.

c)    Different Markets: Goods which are traded within the regions of a country may not be sold in other countries. Even the system of weights and measures, differ from one country to another country. In short, internal markets are different from inter-national markets.

d)    Different Currencies: In international trade, different currencies are used. It is not the differences in currencies alone that are important in international trade, but also the changes in their relative values. The differences in currencies involved in international trade also justify the need for a separate theory of international trade.

e)    Balance of Payments Problem: In internal trade, there is no balance of payments problem. But, in international trade, there is the balance of payments problem, and the balance of payments problem is perpetual. This reason also justifies the need for a separate theory of international traded.

f)     Transport cost: In the case of internal trade, transport cost are not of much significance. But trade between countries involves high transport cost because of geographical distance. This factor also justifies the need for a separate theory of international trade.

g)    Different Trade Policies: The policies relating to trade and commerce, taxation, etc. are the same within a country. But the policies relating to trade and commerce, taxation, etc. are quiet different from country to country.