What are the distinct features of International Transactions?

There are several reasons – practical as well as pedagogic – for evolving a separate theory of international trade and consequent development of a distinctive branch of economics called “International Economics” dealing with issues and problems of the international economy.

International trade follows different laws of behaviour from those of domestic trade. Therefore, a separate theory is inevitable. These reasons, in a way, tend to point out the distinguishing attributes of international transactions. Following Kindleberger, we may enlist the important features of international trade as under?

Immobility of Factors :

The degree of immobility of factors like labour and capital is generally greater between countries than within a country. Immigration laws, citizenship requirement, etc., often restrict the international mobility of labour.

International capital flows are prohibited or severely limited by different governments. Consequently, the economic significance of such mobility of factors tends to equality within but not between countries. For instance, wages may be equal in Mumbai and Pune but not in Mumbai and London.

According to Harrod, it thus, follows that domestic trade consists largely of exchange of goods between producers who enjoy similar standards of life, whereas, international trade consists of exchange of goods between producers enjoying widely differing standards. Evidently, the principles which determine the course and nature of the internal and international trade are bound to be different in some respects at least.

In this context, it may be pointed out that, the price of a commodity in the country where it is produced tends to equal its cost of production. The reason is that, if in an industry the price is higher than its cost, resources will flow into it from other industries, output will increase and the price will fall until it is equal to the cost of production. Conversely, resources will flow out of the industry, output will decline, the price will go up and ultimately equal the cost of production.

Therefore, among different countries, resources are comparatively immobile; hence, there is an automatic influence equalising price and costs. There may be permanent difference between the cost of production of a commodity in one country and the price obtained in a different country for it. For instance, the price of tea in India must, in the long run, be equal to its cost of production in India. But in the U.K., the price of Indian tea may be permanently higher than its cost of production in India. In this way international trade differs from home trade.

To the extent that, there are differences in factor mobility and equality of factor returns, costs and price of goods produced and exchanged between countries as compared to those within a single country, international trade will follow different laws. A distinct set of theories will thus, be needed to analyse international transactions.

Heterogeneous Markets :

In the international economy, world markets lack homogeneity on account of differences in language, preferences, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different. For instance, the Indians have right-hand driven cars while Americans have left-hand driven cars. Hence, the markets for automobiles are effectively separated. Thus, one peculiarity of international trade is that, it involves heterogeneous national markets.

Different National Groups :

An obvious difference between home trade and foreign trade is that trade within a country is trade among the same group of people, whereas, trade between countries runs between differently cohered groups. The socio-economic environment differs greatly between nations, while it is more or less uniform within countries. Friedrich List, therefore, put that: “Domestic trade is among us, international trade is between us and them.”

Different Political Units :

International trade is a phenomenon which occurs between politically different units, while domestic trade occurs within the same political unit. The government in each country is keen about the welfare of its own nationals against that of the people of other countries. Hence, in international trade policy, each government tries to see its own interest at the cost of the other country. As a matter of fact national sovereignty exerts its great influence on the character of economic activity and trade.

Thus, the task of international economics is to discover a common ground, if it can, for economic relationship which will satisfy the various components of a peaceful world.

Different National Policies and Government Intervention :

National rules, laws and policies relating to trade, commerce, industry, taxation, etc., are more or less uniform within a country, but differ widely between countries. Tariff policy, import quota system, subsidies and other controls adopted by a government interfere with the course of normal trade between it and other countries. Thus, state interference causes different problems in international trade while the value theory in its pure form, which assumes-laissez-faire policy, cannot be applied in toto to the international trade theory.

Different Currencies :

Perhaps the principal difference between domestic and international trade is that, the latter involves the use of different types of currencies. That is why there is the problem of exchange rates and foreign exchange. It is a fact that different countries follow different foreign exchange policies. Thus, one has to study not only the factors which determine the value of each country’s monetary unit, but also the fact of divergent practices and exchange resorted to.

Specific Problems :

International economic relations give rise to certain specific problems of a peculiar nature, e.g., international liquidity, international monetary co-operation, evolution of international organisations like the European Common Market, etc. Such problems can never arise in regional economics. These are to be studied separately and solved by “international economics” against the background of world movements at large.