Page 41 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes Basic tenets of the theory

This theory has three main tenets:
1. Difference in factor endowments: It explains trade in natural resource-intensive products
and that a country’s manufactured exports are determined by internal demands.
2. Preference similarity boosts trade between the two industrialized countries: Linder also
contends that the more similar the demand preference for manufactured goods in two
countries (e.g., the United States and United Kingdom), the more intensive is the potential
trade in manufacturers between them. If two countries have the same or similar demand
structures, then their consumers and investors will demand the same goods with similar
degrees of quality and sophistication, a phenomenon known as preference similarity. This
similarity boosts trade between the two industrialized countries.
3. Average per capita income is the most important determinant of the demand structure:
To explain the determinants of the demand structure. Linder argues that average per
capita income is the most important one. Countries with high per capita income will
demand high quality luxury consumer goods and sophisticated capital goods; while low
per capita income countries will demand low quality necessity consumer goods and less
sophisticated capital goods. Consequently, a rich country that has a comparative advantage
in the production of high-quality, advanced goods will find its big export markets in other
affluent countries where people demand such products.

Staffan B. Linder divided international trade into two different categories: primary products
and manufactured goods. Linder asserts that differences in factor endowments explain trade in
natural resource-intensive products but not in manufactured goods. He argues that the range
of a country’s manufactured exports is determined by internal demands. International trade in
manufactured goods takes place largely among developed nations because nations will only
export those goods they manufacture at home and will manufacture at home only those goods
for which there is a strong domestic demand.



Caselet international finance facility: the Global marshall Plan?
ore than one billion people (i.e., one sixth of the world’s population) live in
extreme poverty with lack of water, proper nutrition, basic healthcare and the
Mwelfare services needed to survive. This is in spite of the fact that various loans
and grants have been extended to alleviate poverty. On September 8, 2000, 152 Heads
of State attending the UN’s Millennium Summit unanimously adopted Millennium
Development Goals (MDGs) taking a collective responsibility to uphold the principles of
human dignity, equality and equity at a global level. But the implementation of the goals
was hampered due to the shortage of funds. To finance the MDGs, Gordon Brown, the
UK’s Chancellor of the Exchequer, proposed the setting up of an International Finance
Facility, which would aim to increase worldwide aid funding from $50 billion to $100
billion, by issuing bonds that were backed by aid pledges made by donor countries, in the
international capital markets.

Source: http://www.ibscdc.org/Case_Studies/International%20Trade%20and%20Finance/ITF0027.htm
2.6 Product life cycle theory

Raymond Vernon initially proposed the product life cycle theory in the mid-1960s.Vernon argued
that the wealth and size of the US market gave us firms a strong incentive to develop cost-saving

36 lovely Professional university