1. What are the six (6) main theories of International trade?

Explain and cite an example of

each theory
 Absolute Advantage Theory
Absolute advantage theory was proposed by Scottish social scientist Adam smith in 1776. This
theory says that countries should focus on producing such products that they can produce
efficiently at a lower cost as compared to other countries. Manufacturing a product in which a
particular country specializes is quite advantageous for them. Countries should produce and
export such products which can produce efficiently and import those goods that they produce
relatively less efficiently. This kind of trade will be beneficial for both countries.

Example : Let’s take the example of rice and the knowledge that Vietnam can produce rice at a
lower cost than Japan. Rice is being shipped from Vietnam to Japan due to this circumstance.
Despite this, Vietnam shipped more than one million tonnes of rice overseas in 1989.
The 1990s saw a rise in that nation’s yearly rice exports, which eventually exceeded 3 million
tonnes. This unrivaled competitive edge led to an increase in rice exports, which, in turn,
contributed to a reduction in the poverty level in that nation by driving up work and income.
 Comparative Advantage Theory
David Ricardo in 1817 has given the comparative advantage theory. According to this theory, If
a country cannot produce goods more efficiently than other countries then it should only produce
such goods in which it is most efficient. Countries should specialize and export such products in
which it has a less absolute disadvantage as compared to other products.

Example: In Puerto Rico, one hour of labor can produce either ten bottles of wine or five pieces
of cloth. In France, one hour of labor can produce either 20 bottles of wine or 20 pieces of cloth.
While France has an absolute advantage in both the production of wine and cloth, Puerto Rico
has the comparative advantage in producing wine. This is because if Puerto Rico allocates more
of its resources toward wine production and less of its resources toward cloth product, it has a
lower opportunity cost than France.

 Heckscher-Ohlin Theory
Heckscher-Ohlin theory of international trade was given by Eli Heckscher and Bertil Ohlin. It is
also called as factors proportions theory and states that the country will produce and export those
products whose production require those factory which are in great supply in-country and have
low manufacturing cost. Whereas it will import all such goods whose production requires
nation’s scarce and expensive factors and have high demand. According to this theory, trade
patterns are recognized by factor endowment rather than productivity. The cost of any factor or
resource is simply the function of demand and supply.

Example: Certain countries have extensive oil reserves but have very little iron ore. Meanwhile,
other countries can easily access and store precious metals, but they have little in the way of
agriculture. The Netherlands exported almost $577 million in U.S. dollars in 2019, compared to
imports that year of approximately $515 million. Its top import-export partner was
Germany.5 Importing on a close to equal basis allowed it to more efficiently and economically
manufacture and provide its exports.
The model emphasizes the benefits of international trade and the global benefits to everyone
when each country puts the most effort into exporting resources that are domestically
naturally abundant. All countries benefit when they import the resources they naturally lack.
Because a nation does not have to rely solely on internal markets, it can take advantage
of elastic demand. The cost of labor increases and marginal productivity declines as more
countries and emerging markets develop. Trading internationally allows countries to adjust to
capital-intensive goods production, which would not be possible if each country only sold goods
internally.

 Mercantilism Theory
It is one of the oldest international trade theory which was developed in 1630. Mercantilism
theory states that nation’s wealth is determined by its gold and silver holdings. Every nation in
order to increase its economic strength should increase it’s gold and silver accumulation. It says
that nations should favor export which leads to inflow of gold whereas they should disfavor
import which lead to the outflow of gold. Mercantilism theory focuses on creating a trade surplus
that is more exports than imports which will contribute to the accumulation of the nation’s
wealth.

Example: The Sugar Act of 1764, which required American colonists to pay higher customs
and charges on imported refined sugar products manufactured elsewhere, is a prime
example of mercantilism. Mercantilism is an economic strategy intended to increase an
economy’s exports while reducing its imports. In European countries, imperialism and
colonialism resulted from an economic plan.

 Product Life Cycle Theory

Product life cycle theory was developed in 1970 by Raymond Vernon, a Harvard Business
School professor. It says that initially new products will be produced and exported from the
home country of its innovation. Later on, when demand for the product grows country will
undertake foreign direct investment in other countries and open several manufacturing plants to
meet the request. Both locations of production and sales of product changes along with its life
cycle or as product get matured.

Example: The Product Life Cycle of Coca Cola

 Development: very little is known about the development of Coca-Cola and how they
created the mysterious formula.
 Introduction: by 1886, the year of its foundation, the brand already seemed to have the
right project.
 Growth: less than ten years after its launch, Coca-Cola was already consumed in all U.S.
states.
 Maturity: it’s impossible to say exactly when the brand reached maturity, but it’s safe to
say that it has spent most of its history until now in this stage.
 Decline: since 2012, the net operating revenue of Coca-Cola has fluctuated towards
decreasing; while a small decrease is within what’s expected for the maturity stage,
investments in marketing and new products must continue.
  National Competitive Advantage Theory
It was developed in 1990 by Harvard business school professor, Michael porter. This theory state
that national competitiveness in a particular industry will depend upon the environment that such
industry is getting in the home country. The main source of innovation and up-gradation for such
industry is basically the environment in which they operate which helps countries in getting a
national competitive advantage. Porter determined four factors as determinants of national
competitive advantage of the nation. Local market resources and capabilities, Local market
demand, Local suppliers and complementary industries and characteristics of local firms.

Example: The car manufacturing industry of Germany is one of the best examples to be cited
here. The economy’s best sector complies with all the attributes and, therefore, strives through
global challenges easily. With several competitors in the home market, car manufacturers
continuously innovate and excel. As a result, the nation manages to have the best car models.

Having no speed limits and an aspiration of citizens to have a quality and speedy life encourages
the demand for high-speed luxury cars in the nation. Besides, skilled resources like car engineers
from globally-recognized German universities give car manufacturers an edge over others. Thus,
the demand conditions and factor conditions are all met.

Next, the support from the metal industries that offer the best spare parts to the car manufacturers
tends to be the best support system for the national market. Besides, the German government’s
support in the form of better infrastructure and educational institutions creates a national
competitive advantage for the car industry.

2. Explain and discuss the three product life cycle phases.

New Product – This is the process of figuring out what type of product you want to introduce to
the market. For example, you might do some market research to take a look at opportunities for
potential growth. Then, you might take a look at the capabilities of your company to figure out
how you can create a product that has been designed to meet those needs.

Growth Product -
After you have introduced the market to your product for the first time, he will watch the product
become more popular. You need to focus on your promotional strategy and growth marketing to
generate as much interest in your product as possible. As the product becomes more popular, you
might start to increase online sales. Other companies are going to start to take note of the product
you have released, and they may change their marketing strategy to try to tamp down some of
your sales.
As the market for your product expands, you may tweak some of the features. That way, you can
make it more appealing based on the feedback you get from your customers.

Standardized Product – it is the most profitable stage, the time when the costs of producing
and marketing decline. With the market saturated with the product, competition now higher than
at other stages, and profit margins starting to shrink, some analysts refer to the maturity stage as
when sales volume is "maxed out". Depending on the good, a company may begin deciding how
to innovate its product or introduce new ways to capture a larger market presence. This includes
getting more feedback from customers, and researching their demographics and their needs.
During this stage, competition is at the highest level. Rival companies have had enough time to
introduce competing and improved products, and competition for customers is usually highest.
Sales levels stabilize, and a company strives to have its product exist in this maturity stage for
as long as possible