Question

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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

Answer 1

(a) Vertical Foreign Direct Investment: This type of FDI takes place where the multinational company geographically divides the production by phases. The division of output takes place in order to exploit disparities in relative factor costs. This is called vertical because the stages of production in various countries are carried out one after the other. The simulation of this type of FDI is based on the assumption that different parts of the production process have different input requirements. Because input prices differ across countries, splitting output is efficient, e.g. by labour-intensive processing phases in countries with low labor costs. Example could be, McDonald may purchase a large farm in India to produce meat for their restaurants.

(b) Internal economies of scale: This occurs when a firm expand its volume of production. It is internal to the firm, so it does not depend on the other firms activities. There may be technical economies in a large firms which uses less labour and less time to produce more output. So it will reduce the cost pf production of the firm. This is a example of internal economies of scale. So it happens only when a large firm expand its output as i have already written. There may be various types of internal economies of scale, these can be marketing economies, labour economies, managerial economies, transport and storage economies.

(c) Comparative advantage : The comparative advantage is that a nation creates a product or service at a lower cost of production than other countries. So country has the opportunity to produce commodities cheaply than the other countries. A nation with a comparative advantage is worth the trade-off. The benefits of buying a good or a service outweigh the disadvantages. The country may not be the right one to generate anything. Yet the cost of products or services is a small incentive for other countries to import.

(d) Voluntary export restraint : Voluntary export restraint is a trade limit on the quantity of products that an exporting country is permitted to sell to another country. This is self imposed restriction by the exporting country. This is fall under the non- tariff varrier's category. It happen because importing country may request to the exporting country for this restrictions for the protection of the domestic industries from the foreign competition.

(e) Intra-Industry trade : it refers to the exchange of related goods which belongs to the same industry. This term randomly used in the international trade where same types of commodties and services bothe exported and imported. So in international trade term it means  a situation in which companies operating in the same industry but in different countries specialize in specific goods and participate in foreign trade.

(f) Monopolistic competition : This competition is a imperfect market competition where many suppliers sell goods which are distinguished from each other and are therefore not perfect substitutes. In this competition there are huge number of sellers and buyers, any firm can enter freely and exit this market competition and goal of firm is to maximize profits both in short run and long run.

(g) Gravity model of International trade : This model forecasts bilateral trade flows on the basis of volume of economy and gap between two units. The model used to analyze the factors of bilateral trade flows, such as common boundaries, common languages, common legal structures, common currencies, and colonial legacies, and used to evaluate the efficacy of trade agreements and organizations.

(h) Abundant factor : It means a country has rich in resources that is huge in quantity. Any factors of production which can be easily available anywhere.