This article will help you to learn about the difference between domestic and international trade.
Difference between Domestic and International Trade
Difference – 1. Factor Mobility:
Factors of production like labour and capital usually move freely between different regions of a country (say, from Bihar to West Bengal) than between nations (say, from India to Britain).
Mobility of factors is mainly affected by returns to factors which differ both omission inter- regionally. Factors that restrict migration include differences in language, governmental regulations, customs and tradition.
Difference – 2. Differences in Price:
The value of a commodity within a country is equal to its cost of production in the long run, especially its labour costs, if there is perfect competition. The tendency of wages toward equality within a country results in prices of goods being equal to their labour cost so as to make the return to labour the same in all occupations and regions. But there is always a difference between price and cost internationally, due to immobility of factors.
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Thus there may be a difference between the price of a commodity (say, jute) in one country (say, the UK) and its cost in another country (say, India) even in the long run. There is no automatic tendency for prices to equal costs between different countries. Sometimes transport costs account for this difference.
Difference – 3. Natural Advantages:
Different countries have different natural advantages. That is why a particular commodity can only be produced in a particular location, and not in others. For example, gold is produced in South Africa, coffee in Brazil, oil in Venezuela and tea in India.
Difference – 4. Commercial Policy:
Different regions within the same country are subject to the same sets of economic policies pursued by their government. But, different governments adopt different tariff and exchange rate policies. Exchange rate changes affect different countries differently.
In short, restrictions are sometimes imposed on movement of particular commodities from one region to another. But they differ in nature from restrictions on commodities moving internationally.
Difference – 5. Different Currency:
International trade involves the use of different currencies. In different regions within the same country, the standard currency is the same. This implies that any change in the value of the currency would affect all the regions exactly equally.
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But it is not known whether a change in the value of dollar would affect Indian or Pakistani exports equally favourably or equally adversely. It all depends. Moreover, all currencies are not equally convertible in the foreign exchange market. For example, the rupee cannot be converted in to dollars or other key currencies freely.
Difference – 6. Capital Movement:
The difference in currency has a very important bearing on the international mobility of capital. One major reason why capital moves less freely internationally than inter-regionally is that a change in the value of a currency domestically (say, over time), would equally affect the real value of a bond held domestically, irrespective of where (within the same country) it is held.
But if the exchange rate of a particular country changes, the value of capital held in that country would surely be affected. This risk of a change in the value of foreign currencies tends to make people more inclined to keep their capital at home.