a. “Industrialised countries such as the United States of America, Germany, France and the United Kingdom...

a. “Industrialised countries such as the United States of America, Germany, France and the United Kingdom dominate world trade.” Can you relate this statement with one of the recent theories/models of international trade which predicts that more trade will take place between similar countries? What assumptions of the factor proportions model does this theory violate? Explain your answers.

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Expert Solution

One of the recent theories of internation trade is Porter's competitive advantage theory that is related to the statement. Porter's competitive advantage theory has different components to promote international trade such as abundance of factors of production, industry attractiveness with presence of suitable infrastructure, demand conditions in the market and presence of related and supportive industries. Since industrialized nations as mentioned already have these components in developed forms, then MNCs of one country can operate in another country and vice versa. It will cause, these industrialized nations to trade more with each other as they are similar to each other in terms of industrialization, growth and development as well as presence of infrastructure.

When factor proportion theory is concerned, it has one assumption that any country with similar development, technology of production and factor abundance will produce same goods. It means these Industrialized nations producing same goods will not trade with each other as per the factor proportion theory and it is violated by Porter's competitive advantage theory that relies on attractiveness, demand, presence of specialized infratracheal and supportive industries. So, violation of assumption takes place.

Rahul Sunny answered 1 month ago

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