Untitled Quiz

Limitations of Specialization

• Specialization may not always be economically productive due to vulnerability to changes in technology and price fluctuations.
• A country may choose to forego its gains if it believes its trading partner is receiving too large a share of the benefits.

Division of Gains

• The gains from specialization are not always clear, and a country may choose to forego its gains if it believes its trading partner is receiving too large a share of the benefits.

Transport Costs

• If the cost of delivering products is higher than the savings from specialization, then the gains from trade are negated.

Insufficient Demand

• If trade increases production more than consumption, there is still an advantage. Consumers can gain access to sufficient output by working fewer hours, giving them more leisure time.

Statics and Dynamics

• The theories of absolute and comparative advantage consider gains at a given time (static view), but relative conditions are dynamic and constantly changing.

Services

• The theories of absolute and comparative advantage can also be applied to trade in services.

Production Networks

• The argument for specialization remains valid even in production networks with divisions by components and function within a company's value chain.

Mobility

• China has a large population and economy, and the top ten nations account for more than half of global trade.

Factor-Proportions Theory

• Developed by Eli Heckscher and Bertil Ohlin, the theory holds that countries have their best trade advantage when depending on their relatively abundant production factors.
• The theory assumes production factors are homogeneous, but tests have been mixed.
• The theory becomes complicated when the same product can be created by different methods.

Country-Similarity Theory

• Companies create new products in response to market conditions in their home market and then turn to markets they see as most similar.

Product Life Cycle Theory

• Products go through stages of introduction, growth, maturity, and decline.
• Exceptions to the typical pattern include products with high transport costs, short life cycles, luxury goods and services, products requiring specialized labor, and products that can be differentiated from direct competitors.

The Diamond of National Competitive Advantage

• Introduced by Michael Porter, the diamond of national competitive advantage shows four features as important for competitive superiority: demand conditions, factor conditions, related and supporting industries, and firm strategy, structure, and rivalry.
• All four conditions need to be favorable for an industry within a country to attain and maintain global supremacy.

Limitations of the Diamond of National Advantage Theory

• The existence of the four favorable conditions may represent a necessary but insufficient condition for the development of a particular national industry.
• Firms can gain market information and production inputs from abroad, so the absence of favorable conditions within a country may be overcome by their existence internationally.

Using the Diamond for Transformation

• Understanding and having the necessary conditions to be globally competitive are important, but these conditions are neither static nor purely domestic.

The Theory and Major Effects of Factor Mobility

• Over time, factor conditions change in both quality and quantity, and the mobility of capital, technology, and people affects the relative capabilities of countries.

Why Production Factors Move

• Capital is the most internationally mobile factor, and short-term capital is the most mobile of all.
• People move to gain access to foreign production factors, which may stimulate efficient methods of domestic substitution.

Complementarity

• Factor mobility via foreign direct investment may stimulate foreign trade due to the need for components, the parent company's ability to sell complementary products, and the need for equipment for subsidiaries.