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
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
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
International PLC Theory
Specialisation assumptions (valid?)
Everyone who wants a job has one
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
Reduce the benefits of specialization
Statics and dynamics
Relative conditions in a country change
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 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
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.
New products req $$$ in R & D so most come from developed countries
According to the factor proportions (FP) theory - factors in abundance are cheaper than factors in scarcity. Assumes homogenity in countries.
Production possibilities curve
Graphical representation of alt combinations of goods and services an economy can produce.
An economy’s factors of production are scarce; they cannot produce an unlimited quantity of goods and services.
Importing and exporting probs
Most SMEs site 'shortage of working capital to finance export' as big barrier. Offers low profitability in light of unexpected costs and unknown financial constraints
With high speed connections customers want immediate answers.
Scant IB expertise
Difficulties of understanding foreign business practices. Limited knowledge of competitors, unfamiliarity with lcoal customs etc
High shipping costs / logistic demands, difficulty price matching & promoting. Discouraging for exporters.
Top management commitment
International outlook and risk orientation. Most focus on domestic rather than foreign. Exporting and importing places tough demands on mgmt. Firms with agarness and surplus resources to trade internationally are rare.
Inefficencies due to delays, documents and admin fees. Regulations differ from one country to the next.Homeland security also can be a problem.
Lots of it. Including: duty rates, customs clearance and entry processes. Values declarations, dute management,. Mistakes spawn costs and it can get $$$ to manage
Specialisation of labour
Top managements outlook