Page 49 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes Factor Endowments: A country is endowed with resources such as land, labour and capital.
Isocost Line: It is that line which shows the various combinations of factors which can be obtained
at the same cost. It is also called budget line. It shows what possible combinations of factors a firm
can obtain at the same cost. Isocost line also shows cost-ratio of the factors.
Isoproduct Curve: It is a curve that shows different possible combinations of two factors of
production, like capital and labour, yielding the same amount of output.
Physical Criterion of Factor Abundance or Scarcity: It means that if in a country capital ratio is
greater than labour as against another country, then it will be called capital intensive country.
2.9 review Questions

1. “Mercantilism is a bankrupt theory that has no place in the modern world.” Discuss.
2. Drawing on the theory of comparative advantage to support your arguments, outline the
case for free trade.
3. What are the potential costs of adopting a free trade regime? Do you think governments
should do anything to reduce these costs?
4. “If theories, like girls, could win beauty contests, the comparative cost theory would
certainly rate high in that, it is an elegant logical structure”. Discuss.
5. Critically explain comparative advantage theory of international trade.
6. Explain the comparative cost theory of international trade. What are its assumptions and
limitations?
7. What are the main drawbacks of comparative cost theory of Ricardo? How can this
drawback be removed?

8. Explain the modifications in the Ricardian Comparative Advantage Theory.
9. “The difference of factor endowments among the nations is the basis of international trade.”
Explain.
10. Product life cycle theory has always been a very “attractive theory” to many students.
What do you think are reasons for it?
11. Many trade theorists argue that the primary contribution of Michael Porter has been to
re-popularize old ideas, in new and more applicable ways. To what degree do you think
Porter’s ideas are new or old?
12. Discuss Income-Preference Similarity theory. What are the basic tenets of the theory?

answers: self assessment

1. (e) 2. (d)
3. (d) 4. Mercantilists
5. Adam Smith 6. Endowment
7. Physical 8. Goods
9. Capital 10. Scarce
11. Production 12. Raymond Vernon

13. Linder 14. Technology-based
15. Primary manufacturing

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