Is there a need for a Separate Theory of International Trade?

On this question, there are two views: (i) the classical view and (ii) Ohlin’s view. The Classical View

Classical economists believed that there was a fundamental difference between home trade and foreign trade. They pointed out that, labour and capital move freely within a country but not between different countries.

Thus, international immobility of factors was the basic criterion accepted by the classical economists for the emergence of international trade. Moreover, different national policies, different political units, different monetary systems, and artificial barriers like tariffs and exchange controls involved in international trade distinguish it from domestic trade.

Hence, the classicists observed that the conditions which regulated the exchange of commodities within one such country did not apply to economic relations between different countries. Hence, a separate theory of international trade was necessary and justified.

Ohlin’s View :

Bertil Ohlin, the Swedish economist, however, challenged the traditionally accepted notion on international trade by advocating that there is no need for a separate theory of international trade. In his view “international trade is but a special case of inter-local or inter-regional trade.”

He opines, that, the Marshallian theory of value can be easily extended to the phenomenon of international trade by developing the “space” thesis instead of the “time” hypothesis in the Marshallian Price Theory. “Space element is vital for the international trade and should be given full consideration in the theory of pricing, through its extension from one to a number of more or less closely related markets. Such an extension can be based upon one market analysis.”

In economic life, the concept of “space” has the following significance:

1. The factors of production are generally confined to certain localities, and

2. Free movements of goods are also prevented by the transportation costs and other inhibitory factors.

In short, from the “space” consideration, there arose the concept of mobility or immobility of the factors of production as located not in certain places but in certain “districts.” He further laid down that the concept of “district” should fulfill at least two conditions:

1. There should be significant differences between the districts, and

2. There should be little differences within a single district.

In other words, a district satisfying these two conditions may be regarded as a “region.”

Under these considerations of the space element, if we take the axiom that the factors of production are inter-regionally immobile but intra-regionally (within the region) freely mobile, then most conveniently we can extrapolate the analysis of regional or internal trade into the international sphere. Ohlin, thus, claims that, the development of the concept of one market theory can include the theory of international trade as an integral part of the general price theory, and that, therefore, there is no need for a separate theory of international trade.

Thus, on methodological grounds, Ohlin tends to reject the necessity for a separate study of international economics. We, however, cannot agree with Ohlin on this issue that a separate study of international trade is not warranted purely for methodological reasons.

Apart from methodological reasons, there are various qualifications and variations within a separate branch of study which by all means render a special study quite essential. For an intensive study, a separate branch of the phenomenon is more logical and justifiable than to hold meaningless behavioural generalisations.

We may, thus, say that, since there are specialised branches of economics like theory of value, theory of money, public finance, industrial economics, labour economics and so on, there must also be a special study of international trade separately called “international economics.”