Reasons to Study International Trade Theory

The following points highlight the four main reasons to study International trade theory. The reasons are: 1. Different Monetary Systems 2. Independent Trade Policies 3. Differences in the Degree of Mobility Resources 4. Different Socio-Political Conditions.

Reason # 1. Different Monetary Systems:

First is the independent monetary system. Each country has its own currency and own banking system. Within a region the same currency unit prevails. But for making international transactions domestic currency is of 110 use.

Further, a foreign exchange rate (i.e., the rate at which one currency, say rupee, is exchanged for another currency, say dollar) has an important bearing on exports and imports. As a result, one country may gain while others may loose. However, different regions while carrying on their business/trade activities remain insulated from such change.

Or a change in the value of domestic currency will affect the entire nation uniformly.

Reason # 2. Independent Trade Policies:

Secondly, trade policies differ from country to country. Trading or exchange relationship is strongly governed by the trade policy of a country. Trade policy is concerned with either relaxation or control of trade with the objective of garnering large volume of benefits of trade, since trade involves costs as well.

But, domestically, a uniform regional trade policy is pursued. There may be control or restrictions of the movement of goods within a country, but these are different from international controls.

Reason # 3. Differences in the Degree of Mobility Resources:

Thirdly, a vast difference exists in the degree of mobility of resources between countries. It is said that resources are mobile domestically but immobile internationally. Inputs like labour and capital are free to move or to choose their own areas of activity within a country.

But such is not an easy thing in the international arena where immigration laws, citizenship requirements, etc., come into play to prevent the movement of labour. Similarly, capital flows are also restricted between nations. No such restrictions or controls are placed on their movement within countries.

Reason # 4. Different Socio-Political Conditions:

Finally, socio-political environment varies from country to country, although such environment is uniform within a country.

Market for commodity transactions between different nations is largely governed by its own geographical boundaries, social institutions and customs, habits, choice, etc. Within a country, one observes same social institutions and business customs. Throughout the world, a uniform set of socio-political environment can never exist.

However, all these are not sufficient reasons for the emergence of trade. For instance, if a unique currency system prevails between different nations, trade may also emerge.

When this is the case, economically speaking, we do not find any differences between internal trade and international trade. In this connection, one can cite the introduction (1999) of a uniform currency— called ‘euro’—among the 16 (out of 27 member states of the European Union) members of the European Union.

In these 16 countries, euro is being utilized, but trading relationship has not stopped. Further, in today’s world where market principles are the guiding star, most of these countries follow almost uniform free trade policies.

If this is the case, international trade is not to be distinguished from internal trade. But the principal feature which makes it necessary to treat international trade as separate is the factor immobility between different countries. Lack of mobility of labour and capital has an important bearing on the nature of international trade.

For all these reasons, economists have also specialized in this branch of economics and a vast body of international trade theory has been developed by these specialist economists. Thus, there is no logic to have a uniform trade theory for both international and interregional trade.