I. Literature review of a several outstanding trade theory 1. Heckscher-Ohlin Model Heckscher-Ohlin Model (or H-O Model), developed by Eli Heckscher and Bertil Ohlin, is a general equilibrium mathematical model in international trade theory and international division of labor theory. This model, built on the theory of David Ricardo about comparative advantage, is used to predict which goods are produced by different countries with given factors. H-O model states that a country will export goods requiring factors of production which are abundant in that country, and, otherwise, import goods with input factors that are scarce. For example, Singapore with plentiful capital but limited land has comparative advantage in products that require a lot …show more content…
- Both countries have same production technology. It means that the identical amount of either goods could be produced with the same proportion of factors of production in either country. - Production output is assumed to show constant returns to scale. This assumption implies that if both of factors of production are doubled, output of the products is also doubled. - Products are homogeneous. Commodities of the same type produced in both countries are completely similar and can replace each other. - The ratios of input of two goods are different. The implication is that two commodities will be produced with different ratios of factors of production. For instance, with two factors of production (capital and labor), there is a capital-intensive product and another is labor-intensive. - All factors, except land, are fully mobile within country. It refers that all inputs can be reinvested and reused, without cost, to produce either outputs within a country. - All factors are not mobile and diffused between countries. This means that all factors of production can not freely move between different nations. For example, capital in this country can not be invested into another …show more content…
The Linder hypothesis, for instance, asserts that demand is more significant than comparative advantage in trade, and nations with the same demand will be more likely to trade. For example, both of the United States and Japan are developed countries with considerable demands for cars as well as strong automotive industries. Both nations trade diverse brands of cars to each other, instead of dominating the industry of other country with comparative advantages. In the same way, New Trade Theory states that factor endowments variation can separately develop comparative advantages. 3. Product Life Cycle The failure of Heckscher-Ohlin Model leads to the build-up of new theories to explain occurrences in international trade. The Product Life Cycle theory built up by Raymond Vernon is one of them. The theory describes the life span of a product from initiation, appearing in market to finally removing from the market. According to Raymond Vernon, products are divided into three types based on their stages in the life cycle and how they are in the international trade market. Three types are: - New
Trade has more similarities than differences across regions of the world for three major reasons similar good were traded, geographic location and culture/religion.
As such, because the amount of land is fixed and in the long run the quantities used in production cannot be increased, it is assumed that T ̇...
Despite this, no country has an absolute advantage in everything. Because some countries still have a comparative advantage, there will be trade.
The United States of America (USA) and the United Kingdom (UK) are similar in many different ways, but their economies are much different. The difference in population contributes to several of the differences between the economies. Vast differences in the percentages of the Gross Domestic Product (GDP) that agriculture, industry and services make up are another way in which the economies differ. Last, the share of trade in each economy is extremely different.
The labor theory of trade supposes that the value of commodity comprises of the labor used in its production. Goods that consume equal amount of time should have the same cost. Adam smith stipulates that the amount of labor used in production of a commodity determines its exchange value in primitive society; however, this change in an advanced society since the exchange value includes the profit for the owner of capital. Ricardo argued that the value of a commodity is proportional to the amount of manual and mechanized labor used to produce it.
Underneath these concepts of trade and globalisation we will explore the theories of competitive and comparative advantages of
If supply of components is greater than that required by the parent company then either production will have to be reduced or the surplus will have to be sold to rival firms. Customer choices may be restricted if the parent company insists on only its products being offered for sale.
to say that if a and b are in same ratio with c and d, then any one of the three
Comparative advantage means that an industry, firm, country or individual are able to produce goods and services at a lower opportunity cost than others which are also producing the same goods and services. Also, in order to be profitable, the number in exports must be higher than the number in import. From the diagram we seen above, Singapore is seen to have a comparative advantage in some services. The services are Transport, Financial, business management, maintenance & Repair and Advertising & Market Research, etc. These export services to other countries improve the balance of payment. On the other side, Singapore is seen to have a comparative disadvantage in some services. The services are Travel, Telecommunications, Computer & Information,
The article examines some of the influential theories in the domain of international trade including hyperglobalisation and comparative advantage. The publisher was keen to demonstrate how the theories need to be embraced since hyperglobalisation promotes investments flows from partners pursuing such trading agreements. The trading partners can still reduce their operation cost such as transportation while still navigating the complexities of hyperglobalisation. The author also endeavored to demystify the terminology of comparative advantage by issuing examples and previous concerns reported on the subject. It has been hailed that the traders often traded as per their factor endowments by concentrating on spheres of their specialty. The author also hinted to the readers that the theory of comparative advantage is a major concept since it is the first theory that economics students are briefed on. Arguments in support of the theory reveals that countries that have this level of visibility stand to benefit massively once they specialize in areas of their specialty. He purp...
The Law of Comparative Advantage was introduced by David Ricardo in 1817 in his book ‘Principles of Political Economy and Taxation’. According to this classical theory, a comparative advantage exists for a country when it has a margin of superiority in the production of a certain commodity over others. Comparative advantage results from differing endowments in the factors of production like technology, natural endowments, climate, etc. among different countries. Therefore, each country exports the commodities which it can produce at a lower opportunity cost or, in other words, lower marginal cost of production and imports the rest. This would ultimately be beneficial for all countries engaging in free trade as each would gain through its specialization
...nferencing Email Faxes Handwritten letters All-in-one racing skin-suits Breathable synthetic fabrics Cotton t-shirts Shell Suits iris-based personal identity cards Smart cards Credit cards Cheque books Personal Computer in Product Life Cycle: In product life cycle the computer is in it growth stage as latest development is in progress and daily latest developments are made. According to researchers that computers are in it early stages and has to travel a lot of distance to come at stability. Complex products such as automobiles, defense systems or computers often have short lifecycles, meaning all facets of the product lifecycle planning (PLP) and management (PLM) process, from design through distribution and customer service, need to be streamlined and synchronized. References Principles of Marketing by Phillip Kotler, Marketing Management by Phillip Kotler
In order for international trade to work well, governments must allow the world market to determine how goods are sold, manufactured and traded for all to economically prosper. While all nations may have the capability to produce any goods or services needed by their population, it is not possible for all nations to have a comparative advantage for producing a good due to natural resources of the country or other available resources needed to produce a good or service. The example of trading among states comprising the United States is an example of how free trade works best without the interve...
The factors of production are the inputs in any production process. The completed goods are what result from the process, also often called raw and finished goods. The more factors of production are given as input the higher the number of completed goods will be, and of course the opposite is just as true. The typical factors of production are Land, Labor and capital goods. more recently Entrepeneurship has also been added as one of these factors. Understanding these is essential to understanding the two production functions which this WIKI article focuses on. (2)
For example: Guns and Butter; let’s say that Japan has Comparative Advantage (CA) in making guns and the U.S. has CA in making butter. The U.S. would tend towards making more butter and exporting it to Japan and Japan would do the same with guns. If this were to go on unchecked then Japan might make all of the guns and the U.S. might make all of the butter. Guns are obviously tools of intimidation and butter is harmless yet necessary for food. In this example, once the U.S. completely stopped making guns and devoted all of its resources to butter Japan could just point their guns at the U.S. and demand butter for free.