Diffrences Between Internal And External Trade

DIFFERENCE BETWEEN INTERNAL AND EXTERNAL TRADE

(1)Mobility of factors of production ;Generally speaking ,as compared to the international level of mobility ,factors internally are more freely mobile .in this case of labor, mobility is rather difficult due to the existence of immigration laws .for example the availability of work permits at international level is rather difficult .in the case of capital ,although it is more easily mobile ,but usually one would prefer to the invest in his own country ,inter alia .he feels rather to do so likewise and moreover the Government generally encourages people to invest internally rather than externally .land ,of course ,is virtually immobile at international level and even at an internal level .However ,generally speaking ,other obstacles which exist are e.g. culture ,language and other formalities .Moreover ,free mobility with in the country leads to equality in the costs of production .

(2)Problem of conversion of currency:

In the case of internal trade such a problem does not arise because all transactions take in the country’s own currency .problem arises at the international where the currency of the every country has got to be converted into US dollar (s),or sterling and However ,such a difference is not really major obstacle in external trade .It is only a difference between internal and external trade .

(3)Trade restrictions:

These are particular obstacles where external trade is concerned .This is as because different countries will impose different policies in the form of import and export duties and trade licensing .Moreover ,particulars countries may require a commodity specially designed in the accordance with their needs e.g. in the case auto mobiles ,cars etc ,have to meet standard required of the other country for it to be able to be exported .

(4)TRANSPORT COST:

The cost or expenditures involved is the insuring that a commodity reaches one place from the other varies interalia  in accordance with its trade level .Assuming that commodities are exported just internally then its cost of the transportation will be much less as compared to the similar cost involved at international level for the same commodity

(5)Government concessions:

Generally the govt provides special concessions to stimulate  growth of the particular product internally e.g. in the case of agricultural commodities ,electricity and loans are provided at different rates of the respective entrepreneurs to encourage their production and exports .This would reduce the cost of production favorable and generally such facilities are not provided for external trade of the same commodity unless the government wants to export it and that its demand inelastic e.g. rice Malaysia.

(6)Government policies:

For the purpose of stimulating the growth of a product and stabilizing its price , the govt applies various policies e.g. monetary policy ,fiscal policy ,agricultural policy ,labour policy etc. This is usually done for international trade but may be applied for internal trade as well .Now the nature of these policies are different in different countries .That is why there is a difference in the cost of production of different commodities .Thus ,as a result of the different policies in different countries ,external trade is affected whereas internal trade particularly  remain stable .

(7)Application of import and export policies :

Generally speaking there is need for these commercial policies to be applied for internal trade .However, for external trade these are a must and moreover ,must be done keeping in the view of nature of resources available and the pattern of exportables and importables  between countries . Such policies have got to be made every fiscal year to maximize utilization of resources and climinate their wastage .

(8)Trade situation:

The trade situation at the international level changes rapidly , making it practically difficult to predict a favourable condition for country and to predict the desired demand and supply of the commodity at international level .However ,at the domestic level ,the situation is somewhat better and less elastic ,making it easier to conduct business.

THE THEORY OF COMPARITIVE COSTS IN INTERNATIONAL TRADE

 This theory was developed by Ricardo in 1817 .Basically, from the theory we are able to gather two main points i.e

(1)How international trade takes place between countries? And

(2)How it is beneficial to trade with the rest world?

                As we have explained earlier , international trade takes place as a result of different costs of the production of different products which in turn is based on either one or all of the following I.e. climatic condition ,natural resources and technological know how,

We shall illustrate the theory here based in the following assumptions.

We are only 2 countries in the world and only 2 commodities are produced in the world.

There is perfect mobility of factors of production especially labor, with in the country, and that there is no mobility of such factors between the 2 countries.

 Unit of labor in country are equally efficient.

Goods are produced by one factor of production i.e labor in each country, and thereby is reward determines the cost of production itself.

Transport cost is excluded on the export and import of goods.

Goods are produced under the law of constant return or constant costs.

There are no restriction on the imports and exports of goods between countries which means that both countries are in a free trade zone.

There is perfect competition in the labor and product markets.

There is no problem in the exchange of currencies between the two countries.

(1)There we are only 2 countries in the world and only 2 commodities are produced in the world .

(2)There is the perfect mobility of the factors of production ,especially labour ,with in the country ,and that there is no mobility of such factors between the 2 countries .

(3)Units of the labour in the country are equally efficient .

(4)Goods are produced by one factor production i.e. labour in each country ,and there by its reward determines the cost of the production itself.

(5)Transport cost is excluded on the export and import of goods .

(6)Goods are produced under the law of constant returns /constant costs.

(7)There are no restrictions on the imports and exports of goods between countries which means that both countries are in a free trade zone.

(8)There is perfect completion in the labour and product markets.

(9)There is no problem in the exchange of currencies between the two countries

             Under the above assumptions we will now apply the theory .As we already know ,international trade takes place as a result of the comparative costs ,therefore here we will compare the ratio of cost of production of 2 commodities In the 2 countries .

        A country which produce a specialized product at a competitively lower cost than the other country will then specialize in its production and export it . this country will only import a product in which its cost of the production is relatively higher than the other country and thereby cannot specialize in its production.