Alternative explanations of trade:

The presence of economies of scale in production  also may  influence trade patterns, generally encouraging nations  to specialise  to a greater extent  in  their comparative advantage industries. If economies of  scale are extreme, they may specialise completely in production of export goods.  This is yet another departure from the traditional comparative advantage theories.

Another important recent phenomenon that can be viewed within this general framework is the growing tendency towards intra-industry trade, which the comparative advantage  theories  fail  to explain. Much of  this trade within broad industry  categories  can be understood  in terms of product  differentiation, especially in oligopolistic industries where economies of scale are important; thus, many industrial nations export certain  types of cars  and import other  types, for instance, in the same  industry. The competition among industrial nations resulting from such intra-industry trade  within  the manufacturing sector also creates intense pressures  for governments  to adopt industrial policy strategies to protect and enhance domestic market and export market shares. This  is captured  in the 'New Trade Theory' or the 'Strategic Trade Theory'.

Another significant development in recent years is the expansion of trade in services, although we often tend to think of trade as involving primarily raw materials and manufactured products. Some services, such as transportation and tourism, traditionally have been a part of international  trade. However,  the growing importance of business services involving areas such as technology transfer, construction,  engneering, consulting, accounting, banking, and finance has  raised new questions about how the concept of comparative advantage might apply  in these areas and about the often more subtle barriers that governments utilise to restrict the international  flow of such services.

Finally,  two other factors that influence international  trade patterns but are not incorporated in  simplified trade theories are  transportation  costs  and environmental  regulations. Transportation costs effectively  prevent  the complete international equalisation of prices for  traded goods, with the price in the importing nation exceeding that  in the exporting nation by the amount of the transport costs. Some products either cannot be traded internationally or are  prohibitively  expensive to ship, but  in other cases transportation costs simply  reduce the volume of trade below what it would be without such costs. For  some products, such  as  those involving natural  resources, processing activities will be located either near the resources or near the final markets.