give any five points about how has foreign trade has been integrating markets of different countries
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Foreign trade has been integrating markets of different countries, as it allows the producers to cross internationalboundaries in search of cheap raw materials. The manufactured goods and services can now be sold in various markets of different countries.
1) The Theory of Absolute Advantage by Adam Smith (In his Wealth Of Nations) Smith’s two main areas of contribution are:
a) Absolute Advantage - Each country should specialize in the production and export of that good which it produces most efficiently i.e with the lowest labor hours.
b) Division of labor- The premise of modern industrialization production where each stage in the production of good is performed by one individual separately, rather than one individual being responsible for the entire production of good.
He then extended his division of labor in the production process to a division of labor and production process across countries .Each country would specialize in a product for which it was uniquely suited, possessed absolute advantage and exchange products – trade for goods that were cheaper in price than those produced at home.
2)Theory of Comparative Advantage by David Ricardo in his book ( On the principles of Political Economy and Taxation ) Even if a country possessed absolute advantage in the production of two products ,it still must be relatively more efficient than the other country in one good’s production than the other. It should then specialize in the production and export of that good in exchange for the importation of the other good.
3)Theory of Factor Production by Eli Hackescher and Bertil Ohlin – A country that is labor abundant (capital abundant) should specialize in the production and export of that product which is relatively labor intensive (capital intensive).Assumptions: The theory assumes 2 countries, 2 products and 2 factors of production. The markets for the inputs and the outputs are perfectly competitive. The factors of production, labour and capital were exchanged in markets that paid them only what they were worth.Increasing production of a product experiences diminishing returns. Means as country increasingly specialised in the production of one of the two outputs, it would require more and more inputs per unit of output. Both countries were using identical technologies.
4) The competitive Advantage of Nations by Michael Porter-A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies can gain competitive advantage because of pressure and challenges. Companies benefit from having strong domestic rivals, aggressive homemade suppliers, demanding local customers. Competitive advantage is also gained by concentration of companies in different parts of the same industry. Innovation is what drives and sustains competitiveness. A firm must avail itself of all dimensions of competition which he categorised into 4 major components Factor Conditions- The appropriateness of the nation’s factors of production to compete successfully in a specific industry.
A)Demand Conditions- The degree of health and competition the firm must face in its original home market. Firms that can survive and flourish in highly competitive and demanding markets are much more likely to gain competitive edge.
B)Related and supporting conditions- A firm that is operating within a mass of related firms and industries gains and maintains advantages.
C)Firm strategy, structure and rivalry- No one managerial, ownership or operational strategy is universally appropriate. It depends on the fit and flexibility of what works for that industry in that country at that time.
So because of the 4 theories which substantiate the benefits of trade, countries engage in International Trade.
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