Page 48 - DMGT545_INTERNATIONAL_BUSINESS

Unit 2: Theories of International Trade

is in the use of cashew nutshell liquid (oil), which was once discarded as a waste product. notes
It is now used extensively in industrial production of friction dusts, for formulation in
brake linings and clutch facings. However, the extraction of cashew nutshell liquid has
been too costly, to make the product fully competitive with some other types of oils. There
is also a potential for short-term cashew shortages, such as that occurred in 1999, because
of unfavourable climatic conditions. This has led India to try to increase its production and
its foreign supplies.
Questions
1. What trade theories help to explain where the cashew tree products have been
produced historically?
2. What factors threaten India’s future competitive position in cashew nut
production?
3. If you were an Indian cashew processor, what alternatives might you consider to
maintain future competitiveness?

Source: John D. Daniels, Lee H. Radebaugh & Daniel P. Sullivan, “International Business”, 11th ed., Pearson Education,
p.217-219.

2.7 summary

This unit attempts to give an overview of the functions in as simple manner as possible.

l z This unit has reviewed a number of theories that explain why it is beneficial for a country
to engage in international trade and has explained the pattern of international trade that
we observe in the world economy.
l z We have seen how the theories of Smith, Ricardo, and Heckscher-Ohlin all make strong
cases for unrestricted free trade.
l z In contrast, the mercantilist doctrine and, to a lesser extent, the new trade theory can be
interpreted to support government intervention to prevent exports through subsidies and
to limit imports through tariffs and quotas.
l z In explaining the pattern of international trade, we have seen that with the exception of
mercantilism, which is silent on this issue, the different theories offer largely complementary
explanations.
l z Although no one theory may explain the apparent pattern of international trade, taken
together, the theory of comparative advantage, the Heckscher-Ohlin theory and Porter’s
theory of national competitive advantage tells us that productivity differences are
important.

l z Heckscher-Ohlin tells us that factor endowments matter; the product life cycle theory tells
us that where a new product is introduced is important; the new trade theory tells us that
increasing returns to specialization and first-mover advantages matter; and Porter tells
us that all these factors may be important insofar as they impact the four components of
national demand.

2.8 keywords

Absolute Advantage: A country has an absolute advantage in the production of a product when
it is more efficient than any other country at producing it.
Comparative Advantage: The theory that countries should specialize in the production of goods
and services they can produce more efficiently. A country is said to have a comparative advantage
in the production of such goods and services.

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