Difference between Internal and International Trade11/02/2020
Trade means exchange of goods. What difference, then, does it make to the theory of trade whether these goods are made in the same country or in different countries?
Why is a separate theory of international trade needed? Well, domestic and foreign trade are really one and the same.
They both imply exchange of goods between persons. They both aim at achieving increased production through division of labour.
There are, however, a number of things which make a difference between foreign trade and domestic trade and necessitate a separate theory of international trade.
They are as under:
(i) Immobility of Factors of Production
Labour and capital do not move freely from one country to another as they do within the same country. “Man”, declared Adam Smith, “is, of all forms of luggage, the most difficult to transport”. Much more so when a foreign frontier has to be crossed. Hence differences in the cost of production cannot be removed by moving men and money, the result is the movement of goods.
On the contrary, between regions within the same political boundaries, people distribute themselves more or less according to opportunities. Real wages and standard of living tend to seek a common level, though they are not wholly uniform. As between nations, however, these differences continue to persist for wages and check population movements. Capital also does not move freely from- one country to another. Capital is notoriously shy.
(ii) Different Currencies
Each country has a different currency. India for instance, has the rupee, the U.S.A. the dollar, Germany the mark, Italy the lira, Spain the peso, Japan the yen, and so on. Hence, buying and selling between nations give rise to complications absent in internal trade.
(iii) Restrictions on Trade
Trade between different countries is not free. Very often there are restrictions imposed by custom duties, exchange restrictions, fixed quotas or other tariff barriers. For example, our own country has imposed heavy duties on import of motor cars, wines and liquors and other luxury goods.
Knowledge of other countries cannot be as exact and full as of one’s own country. Differences in culture, language and religion stand in the way of free communication between different countries. On the other hand, within the borders of a country, labour and capital freely move about. These factors, too, make internal trade different from international trade.
(v) Transport and Insurance Costs
Then costs of transport and insurance also check- free international trade. The greater the distance between the two countries, the greater are these costs. Wars increase them still more.
Thus, comparative immobility of labour and capital, restrictions on trade, transport and other costs, ignorance, and differences in language, customs, laws and currency systems make international trade different from domestic trade and necessitate a separate theory of international trade.