DISTINGUISHING FEATURES OF INTER-REGIONAL(INTERNAL) AND INTERNATIONAL TRADE

Inter-regional trade is trade between regions within a country. Ohlin calls it as inter-local trade. This can also be called as internal trade. Inter-national trade, on the other hand, is trade between two nations or countries. A controversy has been going on among Economists whether there is any difference between internal and inter-national trade. Classical economists(Adam Smith and David Ricardo) accepts that there is a fundamental difference. Modern economists(Ohlin and Haberler) believe that the differences are of degree rather than of kind.

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Factor immobility(language, customs, skills.) Natural resources. Geographical and climatic differences(Brazil-coffee, Bangladesh(jute),Cuba(sugar). Different markets. Mobility of goods. Different currencies. Problems of Balance of Payments. Different transport costs. Different economic environment. Different Political groups. Different National policies.

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Factor immobility is there even within countries.

(Rapid developments of USA, Australia, New Zealand, Canada, and Latin American countries in the 19th and 20th centuries has been possible due to the movement of labor and capital from England and Europe).
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Transport costs are involved in both. Currency differences do not necessitate a separate theory when exchange rates are fixed. Regions and nations specialize and trade with each other for the same reasons that individuals specialize and trade.

(1) ADAM SMITHS THEORY OF ABSOLUTE DIFFERENCES IN COSTS. (2) DAVID RICARDOS THEORY OF COMPARATIVE DIFFERENCES IN COSTS

Adam Smith extolled the virtues of free trade. These are the result of the advantages of division of labor and specialization both at the national and international levels. The division of labor at the international level require the existence of absolute differences in costs. Every country should specialize in the production of that commodity which it can produce more cheaply than others and exchange it for the commodities which cost less in other countries.

COUNTRY A B

COMMODITY-X 10 5

COMMODITY-Y 5 10

Let there be two countries, A and B, having absolute differences in costs in producing a commodity each, X and Y respectively, at an absolute lower cost of production than the other, as shown in the table. The table reveals that the country A can produce 10X or 5Y with one unit of labor and country B can produce 5X or 10Y with one unit of labor. In this case, country A has an absolute advantage in the production of X(for 10X is greater than 5X) and country B has an absolute advantage in the production of Y(for 10Y is greater than 5Y) This can be expressed as: 10X of A 5Y of A ---------- > 1 > ---------5X of B 10Y of B Trade between the two countries will benefit both if A specializes in the production of X and B in the production of Y, as shown below

COMMODITY COUNTRY

PRODUCTION BEFORE TRADE

PRODUCTION AFTER TRADE

GAINS FROM TRADE

X A B TOTAL PRODUCTION 10 5 15

Y 5 10 15

X 20 ----20

Y ----20 20

X + 10 -5 +5

Y -5 +10 +5

The above table reveals that before trade both the countries produce only 15 units each of the two commodities by applying one labor- unit on each commodity. If A were to specialize in producing commodity X and use both units of labor on it, its total production will be 20 units of X. similarly if B were to specialize in the production of Y alone, its total production will be 20 units of Y. The combined gain in both countries from trade will be 5 units each of X and Y.

Y-- commodity
Yb

Ya

o
Xb Xa

X--commodity

The figure illustrates differences in costs with the help of production possibility curves. YaXa is the production possibility curve of country A which shows that it can produce either OXa of a commodity X or OYa of commodity Y. similarly country B can produce OXb of commodity X or OYb of commodity Y. The figure also reveals that A has an absolute advantage in the production of commodity X (OXa > OXb) and country B has an absolute advantage in the production of commodity Y (OYb > OYa)

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A producer is required for exporting a commodity in addition to the local consumption. Many under developed countries do not posses absolute advantage in the production of any commodity, yet they have trade relations with many countries.