Friday, August 28, 2009

International Trade as only Special Form of Inter-Regional Trade

Bertil Ohlin believed that there is a little difference between Inter-Regional Trade and International Trade. International values are therefore determined in the same way as they are determined in internal trade according to him “International trade is but a special case of interlocal or inter-regional trade”. Therefore he does not find any justification for separate theory of international trade. He has a number of arguments in support of his statement.

Ohlin does not accept the classical argument that labour and capital are freely mobile within a country but immobile internationally. He argues that labour and capital are also immobile inter regionally within a country. This is apparent from the fact that wage rates differ not only in different trades but also in the same trades in different regions within the same country. Similarly interest rates vary for different purposes in different regions.

Further labour and capital are not immobile between countries. Rather labour and capital have moved from one country to the other. The rapid development of U.S.A., Australia, Newzealand, Canada and the Latin American countries in the 19th and early 20th centuries has been due to the movement of labour and capital from England and Europe.

According to Ohlin the basis of international trade is not much different from inter-regional trade. In both space factor is important and goods move from places of abundant supplies to places where they are scare. Transport costs are involved in both. Trade is carried on by firms for the purpose of maximising profits both in international and inter regional trade. So far as currency differences in international trade are concerned they do not necessitate. Separate theory the rate of exchange between two countries is connected together on the basis of the purchasing power of the two currencies. Since currency of one country is convertible into the currency of another country there is no basic difference between international trades and inter regional trade.

Last but not the least Ohlin argues that the theory of comparative costs is not applicable to international trade alone but to all trade within a country. It is inherent in the principle of specialization that an individual will devote his abilities to those pursuits for which he is best suited. For example the manner of a firm may be able to repair his motor can more cheaply and efficiently than a mechanical at a garage but he does not do so because his time and energy more profitably employed in attending to his business.

As put by Ohlin “Regions and nations specialize and trade with each other for the same reasons that individuals specialize and trade. Some are better fitted by temperament for one work rather than another, one is a better gardener, and the other a better teacher, while third proves an excellent doctor. The gardener would prove a poor teacher and teacher a poor doctor and so on. Thus the gain from specialization is clear. Even if every individual were equally alike in ability it would pay to specialise”. This fundamental principle of specialization which permits all walks of like applies in exactly the same way and with same force to international trade. Thus the application of the principle of comparative costs to international trade is unnecessary because it is the basic of all trade. Ohlin emphasis in this connection “As nations are certainly the most significant of all regions, so that theory of international trade represents the chief of application of the general theory of international trade”.

He therefore believes that there is no need for a separate theory of international trade and regards international trade as “a special case of inter local or inter regional trade”.

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