The exchange of goods and services between countries is called International Trade.
The exchange of goods and services with in a country is called Inter-regional Trade.
Differences between International and Inter-regional Trade and need for a separate theory:
A number of things which make difference between international and inter-regional are given as under. We can understand from these reasons that it gives rise to a separate theory of international trade.
1. Factor Mobility: Labour and capital as factor of production do not move freely from one country to another country as they do with in the same country. Thus labour and capital are regarded as immobile between countries while they are perfectly mobile within a country. Adam Smith said “Man is of all forms of luggage, the most difficult to transport”. Differences in cost of production can not be removed by moving and money. The result is the movement of goods. On the contrary between regions with in the same political boundaries, people distribute themselves more or less according to the opportunities. Real wages and standard of living tend to seek a common level though they are not wholly uniform as between national these differences continue to persist and check population movements. Capital also does not move freely from one country to another country.
2. Different Currencies: Each country has a different currency. Buying and selling between nations give rise to complications absent in internal trade. This hampers smooth flow of trade as between one country and another country. A large number of foreign exchange problems arise in number of foreign trade which are non-existent in inter-regional trade.
3. Different National Policies: Different needs lead countries to pursue divergent national policies and not only with respect to foreign exchange rates. National Policies differ in a wide matter of domestic matters affecting international economic relations, wages, prices, competition, investment, business regulation etc and often involve interference directly in international economic intercourse in tarrifs, exchange controls, non-tarrif barriers and the like.
4. Different Political Circumstances: Mostly countries differ in political circumstances. In inter-regional trade, trade takes place among same people. But international trade takes place among people of different cultures, habits and languages. These cultural distinctions between markets, important in the absence of different national measures have led political scientists to take look at the nature of countries.
5. Difference in National Resources: Different countries are endowed with different type of natural resources. They tend to specialise, in the production of those commodities in which they are richly endowed and trade them with others where such resources are scare.
6. Geographical and climatic differences: Every country cannot produce and commodities due to geographical and climatic conditions, except at possibly prohibitive costs. Countries having climatic and geographical advantage specialise in the production of particular commodities and trade them with others.
7. Different Markets: International markets are different in various aspects. Even the system of weights and measures and pattern and styles in machinery and equipment differ from country to country. Goods which are traded within regions may not sold in other countries. This is why in great many cases products to be sold in foreign countries are especially designed to confirm to the national characteristics of that country.
8. Problem of Balance of Payments: The problem of balance of payments is perpetual in international trade while regions with in a country have no such problem.
9. Restrictions on Trade: Trade between different countries is not free. There are restrictions imposed by custom duties, exchange restrictions, fixed quotas or other tarrif barriers.
10. Ignorance: Differences in culture, language and religion stand in the way of free communication between different countries. In inter-regional trade labour and capital freely moves about. These factors too make internal trade different from international trade.11. Transport and Insurance Costs: The cost of transport and insurance also check the free international trade. The greater the distance between the two countries the greater the cost and insurances.