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Theory of Absolute Advantage

Theory of absolute advantage

Countries can produce some goods more effect­ively and efficently than others.

Theory of compar­ative advantage

Free trade can increase global output even if one country has an absolute advantage in the production of all products

Trade pattern theories

Theory of country size
Large depend on export less than small. Large = varied climates and more resources, so more self sufficent.
Russia, USA, Brazil, India, China are large
Size of economy
Developed countries more likely to trade. Top 10 export­/im­porters developed countries. Developed economies produce more so have more to trade, incomes are high so people buy more.

With whom trade theories

Countr­y-S­imi­larity theory
Developed trade mostly with eachother because they - produce and consume more, create new products to compete, produce differ­ent­iated products and services
Specia­lis­ation and aquired advantage
Provide other countires an advantage over domestic producers. Specialise to grain advantage, eg Germany = machinery & equip
Product differ­nti­ation
Cultural similarity
Importers and expoerters find it easier to trade with countries they are similar to in language and or culture
Political relati­onships / economic agreements
May discourage or encourage trade
Overcoming distance
Transport costs

Intern­ational PLC Theory


Specia­lis­ation assump­tions (valid?)

Full employment
Everyone who wants a job has one
Economic efficiency
Minimi­sation of real and opport­unitiy costs of production by exploiting compar­ative advantages rather than nesses­sarily absolute advantages
Division of gains
Ops for gains: resource owners benefit by sale of one output for other, more highly valued goods.
Two countries, two commod­ities
Simplified version of reality
Transport costs
Reduce the benefits of specia­liz­ation
Statics and dynamics
Relative conditions in a country change
Production networks
bits of products made in different countries
Assume resources can move domest­ically to where they are needed. Not always valid.

Free trade results in

Specia­lis­ation - natural advantage
Soil, natural resources, fish in seas, minerals, wildlife, rainfo­rests
Specia­lis­ation - aquired advantage
Product or process technology
Increased efficency
Increased global output

What type of products are traded

People and land
Countries with high people to land ratio trade labor with wheat and wool for example
Manufa­cturing locations
Places which need lots of room manufa­cture inplaces where there is a lot of room.
Capital, labor rates and specia­lis­ation
Production factors are not homoge­nous, vary within and among countries coz of traini­ng/edu differ­ences
Process tech (FP theory results varied)
Companies may substitute capital for labour, depending on the cpst of each.
Product tech
New products req $$$ in R & D so most come from developed countries
According to the factor propor­tions (FP) theory - factors in abundance are cheaper than factors in scarcity. Assumes homogenity in countries.

Production possib­ilities curve

Graphical repres­ent­ation of alt combin­ations of goods and services an economy can produce.
An economy’s factors of production are scarce; they cannot produce an unlimited quantity of goods and services.

Importing and exporting probs

Financial risks
Most SMEs site 'shortage of working capital to finance export' as big barrier. Offers low profit­ability in light of unexpected costs and unknown financial constr­aints
Customer management
With high speed connec­tions customers want immediate answers.
Scant IB expertise
Diffic­ulties of unders­tanding foreign business practices. Limited knowledge of compet­itors, unfami­liarity with lcoal customs etc
Marketing barriers
High shipping costs / logistic demands, difficulty price matching & promoting. Discou­raging for exporters.
Top management commitment
Intern­ational outlook and risk orient­ation. Most focus on domestic rather than foreign. Exporting and importing places tough demands on mgmt. Firms with agarness and surplus resources to trade intern­ati­onally are rare.
Trade regulation
Ineffi­cencies due to delays, documents and admin fees. Regula­tions differ from one country to the next.H­omeland security also can be a problem.
Trade docume­ntation
Lots of it. Including: duty rates, customs clearance and entry processes. Values declar­ations, dute manage­ment,. Mistakes spawn costs and it can get $$$ to manage

Why import?

Specia­lis­ation of labour
Global rivalry
Local unavai­lablity
Top manage­ments outlook


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