International trade is trade carried on between the inhabitants of different countries and is due to the same causes as domestic trade; that is, trade carried on within a country. Exchanges may be carried on between two localities in the same country because the two localities are differently endowed by nature. One locality may contain mineral deposits, for instance, and the other locality may be especially adapted for agricultural production. It will, therefore, be to the interest of both localities to exchange, inasmuch as both localities may need the minerals and the agricultural produce, whereas the agricultural community cannot produce the minerals at all, and the mining community can perhaps produce the agricultural produce only with great difficulty.

The situation is not changed if the mining community happens to be in one country and the agricultural community in another. Thus, for example, tin is mined in Wales and not in the United States. On the other hand, the United States can produce wheat at much less cost than can the Welsh. For this reason an exchange of wheat and tin between Wales and the United States may be found desirable. An exchange of tropical products for those of the temperate zone will be found advantageous for the same reason. Bananas might be produced in the United States under glass covers, but such production would be at a great disadvantage. On the other hand, many products of the United States cannot be conveniently produced in the tropics. It will, therefore, often be found convenient and desirable to carry on an exchange of goods between the United States and tropical countries.

The exchanges already referred to rest on natural differences in two localities but in a second class of instances exchanges may be carried on profitably where nature has not made a distinction in its endowment of the two localities. Thus, for instance, the manufacture of cotton goods may have grown up in one city, and the manufacture of woolen goods in another, and an exchange of the two commodities may be carried on between the two communities. The exchange here rests not on any natural advantage but on the fact that the industries have grown up in the respective places and that each place produces its kind of goods more cheaply. Exchange may be carried on advantageously between these two places whether they are both in the same country or in different countries. The exchange rests on the fact that each type of goods is produced more cheaply in its own place. In a third instance, it may be that both goods are produced more cheaply in one of the localities than in the other and yet that an exchange may take place between the two localities. Suppose, for example, that the goods A and B are both produced more cheaply in country X than in country Y but that the difference in the cost of producing the two goods is greater in one country than in the other, so that while country X produces A more cheaply than country Y can produce it, country X produces B very much more cheaply than country Y can produce it. In this case, country X will produce B and country Y will produce A and a satisfactory exchange of the two articles will take place between the two countries. Although X can produce A absolutely more cheaply than Y can, it has such a relative advantage in producing B that it will pay it to expend all of L its energies upon the production of B and to secure its supply of A from country Y.