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In: Economics

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1. Explain the following concepts in 50 words maximum for each concept . a) Vertical foreign direct investment b) Internal economies of scale c) Comparative advantage d) Voluntary export restraint e) Intra-industry trade f) Monopolistic competition g) Gravity model of international trade h) Abundant factor

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Expert Solution

a) vertical foreign direct investment:

FDI is a type of investment from a party/person of a country into a business of another country. in vertical FDI, conducting different activities in another country is linked to the main business or simply introducing new supply chain into another country. there are two types of vertical FDI: 1. forward vertical FDI, in which company comes nearer to a market through FDI. For example, buying distributorship in a country by a foreign company) 2. backward vertical FDI, going back to raw material through international integration ( buying stake in raw material manufacturing)

b) Internal economies of scale:

economies of scale occur when the production of a company's increase which leads to lower fixed costs. as internal economies occur inside the company they can be controlled by the management itself. internal economies results due to larger production because they buy materials in bulk which reduced per-unit cost and adding into profits. there are 5 types of internal economies of scale: 1. technical economies of scale due to inefficiencies in the production 2. monopsony power economies of scale due to excess buy of materials which reduce the per-unit cost. 3. managerial economies of scale due to effective management and can afford specialists. 4. financial economies of scale when the company can access cheap capital. 5. network economies of scale due to online business.

c) comparative advantages:

countries such as the US, Saudia Arabia has competitive advantage upon chemicals as compared to countries those don't produce oil and similarly, India has a competitive advantage over the US on call centres services due to cheap service available over here. so, producing goods or services at a lower cost than the opportunity cost is known as comparative advantages.

d) voluntary export restraint:

voluntary export restraint is the trade restriction imposed by the government on the quantity of goods export to other countries. these can be considered under non-tariff barriers through quotas and embargoes. it is a measure requested by the importing countries as a protected measure to protect the domestic market.

e) intra industry trade:

it is the exchange of goods that are similar and belongs to a similar industry. here intra word is used to show that that similar kind of goods or services is being exported or imported. three types of intra industry trade: 1. trade in homogeneous goods 2. trade-in horizontally differentiated goods 3. trade-in vertically differentiated goods. the importance of intra industry trade is this will leads to innovation and economies of scale will also exploits which will benefit both industry and consumer.

f) monopolistic competition:

when in a market there are a number of firms in competition but sells slightly different products. it is a type of imperfect competition. the product can be differentiated on their appearance, branding and quality. for example restaurant, hotels etc providing the same service but appearance and quality may differ. 4 conditions of monopolistic competition: 1. large numbers of buyers and sellers 2. perfect information 3. low entry and exit barriers 4. differentiated goods

g) gravity model of international trade:

this model helps in the prediction of bilateral trade flows on the basis of economic size and distance between two units. this model was introduced in 1954 by Walter Isard. this law is based on the law of gravitation and used to estimate the amount of interaction between two cities. the main importance of this model is that helps in the prediction of trade flows between two countries.

h) abundant factor:

it can be defined ad the richness of resources in a country. the abundant factor of a country is capital and labor. it means country with capital abundant will export the capital internsive goods and country with labor abundant will export the labor intensive good


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