International trade theory is simply an exten­sion of general economic theory on interna­tional setting.

Thus, international trade theory is a branch of exchange theory where ex­change relationship develops between na­tions, rather than between regions.

A region is a geographical sub-division of a country. Trading relationship that develops between regions of the same country is called internal trade.

When exchange and trading relation­ship grows between nations or countries we have international trade. Anyway, such ex­change between regions takes place because of specialisation of a region. In other words, regional specialisation is the basis of domes­tic trade.


Similarly, the basis of international trade is the specialization or division of labour or cooperation. If the basis of any trade is spe­cialisation then why should there be a sepa­rate international trade theory? If international trade is just simply a logical extension of in­ternal trade, then why should there be a dis­tinction between interregional trade and in­ternational trade?

There are several reasons to study inter­national trade theory rather than a general trade theory:

(i) Monetary System:

First is the indepen­dent monetary system. Each country has its own currency and own banking system. Within a region same currency unit prevails. But for making international transactions do­mestic currency is of no 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 other may lose. How­ever, different regions while carrying their economic activities remain insulated from such change. Or a change in the value of do­mestic currency will affect the entire nation uniformly.

(ii) Trade Policy:


Trade policies differ from country to country. Trading or exchange rela­tionship is strongly governed by trade policy of a country that it pursues. 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.

(iii) Degree of Mobility of Resources:

A vast difference exists in the degree of mobility of resources between countries, ft 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.

(iv) 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.

For all these reasons, economists have also specialised 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.