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,...