International trade is defined as the exchange of goods and services between parties located in different countries. It has several distinguishing features compared to domestic trade within a country, such as the immobility of production factors across borders, geographical and climatic differences between countries, and differing currency and political systems among trading nations. Managing the balance of payments, or the difference between a country's total imports and exports, is also a unique issue for international trade that does not apply to domestic trade within one country.

1. International Economics
Learning Objectives
♥ Definition of Domestic &
International Trade
♥ Features of International Trade.
♥ Balance of Payments

2. International Economics
2.1 Definition of International Trade [IT]
Trade: Exchange of goods & services.
Domestic Trade: Trade among parties in the
same country. Also termed internal
trade.
International Trade: Trade among parties
residing in different countries.
Purchase or sale of goods / services,
borrowing or lending capital and transfer of
technical services among countries
constitute IT.

3. International Economics
2.2 Definition of Regional Trade [IT]
Trade among parties in the same country
but residing in different parts or states is
referred as inter regional or also as
internal trade.
Some economists like Ohlin or Haberler hold
the view that there is no fundamental
difference between inter regional and inter
national trade.
But classical economists Smith and Ricardo
find fundamental differences are there &
have developed theory of comparative [cost]
advantage to explain them.

4. International Economics
2.3 Distinguishing features of International Trade
1. Immobility of factors of Production:
Within a country labour and capital moves
freely to get maximum returns. These factors
of production do not move with such freedom
among different countries due to new
culture, climate, language, customs and
political restrictions imposed by the
states.
This immobility gives rise to wage and
interest rate differentials among countries.

5. International Economics
2.3 Distinguishing features of International Trade
2. Geographical & Climatic differences and
differences in natural resource endowments:
Each country has its unique climate which is
responsible for agricultural products of
that country e.g. raw jute from Bangla Desh.
Natural resource endowments allow Gulf
countries to produce oil.
Australia with vast expanse of land produces
wheat, mutton & wool.

6. International Economics
2.3 Distinguishing features of International Trade
3. Differences in market conditions:
Each country has varying market features of
weights & measures,
languages
fashions
tastes
Parties to international trade, need to
study these features of the country with
whom they wish to trade.

7. International Economics
2.3 Distinguishing features of International Trade
4. Different currency system:
While a trader can transact in Rupees while
trading in India, he has to transact in
Dollars, Pounds, Euros or Yen while trading
with USA, UK, Europe and Japan respectively.
This introduces additional cost & risk in
international trade as the value of
currencies is subject to variations.
Some currencies are easily convertible into
others, but not all.

8. International Economics
2.3 Distinguishing features of International Trade
5. Higher Transfer costs:
Because of the long distances involved
transport costs for international
transactions are higher than for domestic
trades.
6. Different Political Systems:
In domestic trade parties carry transactions
with due regard to national interests. Such
loyalty is absent in international trade as
each party aims at maximum gain for itself.

9. International Economics
2.3 Distinguishing features of International Trade
7. Different Trade Policies:
In terms of commerce, taxation,
export/import tariffs there is a single
policy governing transactions under domestic
trade.
This is not the case with international
trade. Parties have to study and adopt
policies of both the countries involved in
the trade.

10. International Economics
2.3 Distinguishing features of International Trade
8. Problem of Balance of payments:
Some countries, especially developing ones,
want to import substantial capital goods
from overseas to build infra structure for
growth of their economy.
The countries which supply the goods are not
always in a capacity to buy equal amount of
goods and services from these developing
nations. Nor are the developing countries in
a position to match their exports with
imports.

11. International Economics
2.3 Distinguishing features of International Trade
8. Problem of Balance of payments:
This creates a deficit in the balance of
payment of a developing country.
Measures have to be taken by the Government
to correct the situation as a country cannot
survive with a perennial deficit in BOP.
These measures are peculiar only to the
international trade.
The End !

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