Question

. Describe the Specific Factor Theory of Trade, the assumptions, and give an example of your choice that demonstrates an autarky (no trade) to a free trade solution. Use a PPC type graph/model with values of your choice to demonstrate the solution stages.

3. Describe the “Product Cycle” Theory of Trade, its phases and why it may result in a type of two-way trade over time.

Answer 1

Specific factor theory of trade:

Specific factor theory is that theory which are suitable for use of specific nature as well as cannot be transferred from one industry to another industry. For instance if any worker has skilled in making clothes cannot absorbed into the industry of spares part of car.

Assumption regarding the specific factor theory of trade:

Specific factor theory of trade assumes that an economy manufacture or produces two types of goods with two factors of production in the perfectly competitive market namely: labour and capital. For a particular industry capital is assumed to be specific in nature from the two factors of the production. Thus it is completely immobile.

Product cycle theory of trade:

This is also known as economic theory and Raymond Vernon was developed this cycle of theory. There are five stages of product cycle theory of trade such as:

Product introduction: this is that step in which product is manufacture. For create th demand producers promote the fresh new products. for increasing demand producer charge low rate or earn low rate of profit , because more and more units will sale then next stage will automatically achieve.

Growth of the product: if customers’ demands more it indicates the sales rises. Due to this cost of production low as well as profits will high.

Maturity: In this stage the product is widely known by most of customers. There are various suppliers for the product, for increase profit margins, suppliers can reduce the prices of goods and services.

Two –way trade:

In this type of trade both import and export for goods and services is called two way trade with two important reasons such as effects of season as well as cost of transportation.