Trade theories

Question 1

Mercantilism?

Answer 1

Classical country based:

countries should export more than they import to maintain a favourable balance of trade and avoid an unfavourable balance of trade

Question 2

What theories support free trade?

Answer 2

Absolute advantage theory

Comparative advantage theory

Question 3

Absolute advantage?

Answer 3

Classical country based:

Different countries produce some goods more efficiently than others

Supports free trade resulting in specialisation through natural or acquired advantage, greater efficiency and a higher global output.

Question 4

Competitive advantage?

Answer 4

Classical country based:

Occurs when a country can produce all goods at competitive advantage.

Gains from trade occur even in a country that has absolute advantage in all products because it gives up less efficient output to focus on more efficient output.

Question 5

Why were modern trade theories developed?

Answer 5

• Classical theories deficient in addressing expansion of MNCs and intra industry trade
• Modern theories incorporate consumer and brand loyalty and technology and quality into trade flows

Question 6

Product life cycle?

Answer 6

establishes the production location of certain manufactured product shifts as they go through their life cycle

Question 7

What are the limitations of the product life cycle?

Answer 7

• The theory was developed when most new products were developed, made and sold in the USA
• Theories ability to predict present day trade flows is weak due to globalisation resulting in mass new products throughout the world
• Rapid pace of innovation and product development makes it difficult to explain trade patterns
• Internet makes it possible for companies to reach global market place from products inception

Question 8

Global strategic rivalry theory?

Answer 8

Companies that are first to market can create barriers to entry

Strategic intervention by governments can occur in certain industries

First movers tend to have high up front costs of entry and are highly capital intensive

Question 9

Diamond of national competitive advantage theory?

Answer 9

Theory that argues there are four conditions important to gaining and maintaining competitive superiority.

1) Demand conditions (are consumers likely to buy)
2) Factor conditions (sufficient quantities of the combination of labour, capital and raw materials at the right price)
3) Related and support industries (can the company outsource parts to allow focus on what the company is best at)
4) Firm strategy, structure and rivalry (will competitive conditions and the organisations reaction to them enable the company to evolve operations to sustain and improve market position

Question 10

What are the four stages of the product life cycle?

Answer 10

1) Introduction
2) Growth
3) Maturity
4) Decline

Question 11

Why do governments intervene?

Answer 11

1) To achieve economic, social and political goals

Economic reasons:

• Fighting unemployment
• Promoting industrialisation
• Improving comparative position

Non-economic reasons:

• Maintaining essential industries
• Preserving national culture
• Maintaining or extending spheres of influence