NTA UGC NET - Commerce: Unit 01 _ Business Environment and International Business (part 02)

 

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 Unit 01

Business Environment and International Business part 02

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Theories of international trade 

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MCQ 01. Which of the following theory says that, to export was good and to be encouraged but to import was had and to be discouraged?
 

a) Comparative Advantage Theory
b) Theory of Absolute Advantage
c) Factor Endowment Theory
d) Mercantilism Theory 

 

Answer: Mercantilism Theory

 

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I. Theory of Mercantilism:
 

Prevailed during 16th to 19th centuries

 

The wealth of a nation is measured in terms of its accumulated gold and silver

 

Focuses on accumulating wealth by encouraging exports and discouraging import

 

Observe trade as a zero – sum game (gain by one county result in a loss by another)

 

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II. Theory of Absolute Advantage: 

 

Adam Smith - 1776 - The Wealth of Nations
(countered it was impossible for all nations to become rich simultaneously by following mercantilism)

 

Wealth of nations depends upon the goods and services available to their citizens (Living standard). rather than their gold reserves.

 

countries should only produce goods in which they have an absolute advantage (if it can produce a good at a lower cost than another individual, business, or country.)

 

Observe trade as a positive – sum game

 

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III. Comparative Advantage Theory
 

David Richardo – 1817

 

Countries should specialize in producing and exporting those products in which they have comparative advantage (or low opportunity cost) compared with other countries and should import those products which In which it has a comparative disadvantage. 

 

 

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IV. Heckscher – Ohlin Theory ( H O): 

 

Factor Endowment (Proportions) theory

 

Eli Heckscher and Bertil Ohlin

 

The countries should produce and export goods that they can most efficiently and plentifully produce. ( factors of production that a country has in abundance)

 

 

 

 

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V. Product Life Cycle Theory: 

 

Raymond Vernon - 1966

 

Export and Import is based on Life Cycle

  

 

 

 

 

 

 

 

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VI. Theory of Competitive Advantage 

 

Michael Porter

 

diamond model

 

The theory attempt to analyse the reason for a nations success in a particular industry

 

    Determinants 

        _Factor conditions.

        _Demand conditions.

       _ Related and supporting industries.

       _ Firm strategy, structure, and rivalry. 

 

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