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a) Discuss the characteristics of the modern trade theories: Product Life Cycle Theory and Strategic

Trade Theory. (Hint: Look at the definition of the concepts and the elements involved)

Modern trade theories are the major theories of international trade that were advanced in the 20th
century, which consist of (1) product life cycle, (2) strategic trade, and (3) national competitive advantage
of industries.
Product life cycle theory is a theory that accounts for changes in the patterns of trade over time by
focusing on product life cycles. It says that the advantage resides with the lead innovation nation and
spreads to advanced nations and then to developing nations. Please see Figure 5.4 below for illustration:
Strategic trade theory is a theory that suggests that strategic intervention by governments in certain
industries can enhance their odds for international success. It says that governments can help domestic
firms get an advantage in some industries.
First-mover advantage – benefit that accrues to firms that enter the market first and that late entrants do
not enjoy
Strategic trade policy – government policy that provides companies a strategic advantage in
international trade through subsidies and other supports

b) Discuss the economic AND political arguments against free trade. Give specific examples.

Comparative advantage is the relative (not absolute) advantage in one economic activity that one nation
enjoys in comparison with other nations.
Factor endowment theory (or Heckscher-Ohlin theory) is a theory that suggests that nations will
develop comparative advantages based on their locally abundant factors.
Free trade is the idea that free market forces should determine how much to trade with little or no
government intervention.
Theory of absolute advantage is a theory that suggests that under free trade, a nation gains by
specializing in economic activities in which it has an absolute advantage.
Theory of comparative advantage is a theory that focuses on the relative (not absolute) advantage in
one economic activity that one nation enjoys in comparison with other nations.
Theory of mercantilism is a theory that suggests that the wealth of the world is fixed and that a nation
that exports more and imports less will be richer.
Theory of national competitive advantage of industries is a theory that suggests that the competitive
advantage of certain industries in different nations depends on four aspects that form a “diamond.” Also
known as the diamond theory.

c) Discuss the factors that managers need to consider when assessing the comparative
advantages of various locations around the world.

Managers should discover and leverage the comparative advantage of world-class locations. They should
monitor and have the ability to nurture current comparative advantage of certain locations and take
advantage of new locations. Managers should also be politically active to demonstrate, safeguard, and
advance the gains of their organizations from international trade.