Question

Describe the features of international trade data which cannot be reconciled with classic trade theory and explain how they are reflected in newer models in international trade.

Answer 1

(1) Factors of Immobility:
In general, the degree of immobility of variables such as labour and capital is greater between countries than within a country. International labour mobility is also limited by immigration rules, residency, qualifications, etc.

Different governments are prohibited or seriously constrained by international capital flows. Consequently, the economic importance of variables such as mobility tends to be comparable among, but not within, nations.

It follows, according to Harrod, that domestic trade consists, to a large degree, of exchanges of goods between producers which enjoy identical standards of living, while foreign trade consists of exchanges of goods between producers which enjoy very different standards. Obviously, at least in some ways, the concepts which define the direction and essence of internal and foreign trade are bound to be different.

It can be pointed out in this sense that the price of the commodity in the country in which it is manufactured appears to be equal to its cost of production.

The explanation is that if the output of an industry is higher than the expense, capital from other industries will flood into it, demand will rise and the price will drop until it is equal to the cost of demand. In comparison, resources will drain out of the market, demand will fall, prices will increase and the cost of production will eventually be equal.

However, commodities are comparatively immobile, as between separate countries; therefore, there is no automatic price and cost equalizing effect. Therefore, a lasting distinction can be made at the expense of the output of material.

In one country and the price earned for it in another country. The price of tea in India, for example, needs to be equal to its manufacturing cost in India in the long run. But the price of Indian tea could be indefinitely higher in the United Kingdom than its production cost in India. International trading varies from domestic trading in this manner.

(2) Industries that are heterogeneous:
World economies lack homogeneity in the international economy due to variations in environment, language, tastes, behaviour, practises, weight and calculation, etc. Therefore, the behaviour of foreign customers in each case will be different.

(3) Different National Groups:

The foreign exchange between distinctly unified groups takes place. Among various nations, the socio-economic climate differs greatly.

(4) Different Units of Politics:

International trade is a phenomenon taking place within numerous political units.

(5) Separate national policies and interference by governments:
From one nation to another, economic and political strategies vary. Immigration, immigration, export and import, taxes, etc. policies still vary greatly among nations, but they are more or less standardised within the world. The customs scheme, the scheme of import tariffs, subsidies and other restrictions introduced by governments conflict with the usual course of trade between countries.

(6) Different currencies:

Another noteworthy characteristic of foreign exchange is that the use of multiple forms of currency is included. So, in relation to exchange rates and foreign exchange, each country has its own policies.