Pure Trade Monetary Theory
International trade theories are usually classified into pure and monetary theory the pure (or equilibrium theory of international trade deals with equilibrium phenomena of trade. It seeks to analyse and expose the conditions of equilibrium in real terms. It probes into the economic causes and consequences of international trade. The monetary theory of foreign trade is confronted with the monetary mechanism of international economic transactions, including financial transactions and capital movements. It primarily deals with the determination of exchange rates and seeks to examine the methods and processes of adjustments in the balance of payments equilibrium.
The pure theory of international trade answers three sets of questions. First why do nations enter into trade? Second how are gains of trade shared by the trending nations? Third how does international trade affect the allocation of resources in the domestic economy of the trading country?
A distinctive feature of pure theory of international trade is that it is part of general theory of value. It is however static general equilibrium theory (whether it analysis) at the most pure theory is a rudimentary dynamic analysis. The monetary theory of international trade is a rudimentary dynamic analysis. The dynamic theory which is closely related to the trade cycle theory and keyless general theory of income and employment.
In economic literature so far however no successful attempt has been made to explain fully how these two types of theories are interlocked perhaps the reason for this may not be far to seek. The pure theory of international trade fundamentality deals with the shift in the economic equilibrium form one position to another on account of dynamic changes like changes in preference technology economic monetary theory of international trade on the other hand is confide to the process of adjustment leading back to equilibrium pure theory generally could not very equilibrium positions. As such international monetary theory has always to confront one or the other of the following problems either (1) it is tribally simple or (2) it involves specific and sometimes unrealistic assumptions about the nature of adjustment. The latter fact however puts the generality aspect of the theory in doubt. Consequently, it becomes difficult to integrate monetary theory into the skeleton of pure economic theory in a rational and realistic manner.
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