Question

1. Explain briefly the following:

(i) Fallacies of International Trade

(ii) David Hume’s price-specie-flow mechanism

(iii) Product life cycle theory of trade

Answer 1

Answer i) :- Fallacies of International trade.

a) Benefit for only one:- It is said that, only one country gain while the other country suffer in international trade. But this is untrue, because there are many instances when both parties gain in trade.

b) only trade surplus is good:- If you think that only export help the country in their economic growth, then you are wrong because, only export will create higher inflation in the country.

c) Another fallacy of international trade is that there is free trade. Particularly in relation to tobacco. Although tariffs are seemingly nonexistent, the trade-off is its cost for public health.

Answer ii) :- The price-specie flow mechanism is a models given by David Hume show how trade imbalances may be automatically adjusted under the gold standard in its original form, the model assumes that most effective gold coins are circulated and the function of central bank is trivial.
For example:- Suppose there's a trade deficit There are greater imports than exports. This effects in an outflow of gold, subsequently reducing domestic money supply. Then the price value falls, which in turn makes domestic Products especially less expensive than foreign Products. This leads to greater exports and less imports thereby self-correcting the trade imbalance.

Answer iii) :- This theory was given by Raymond Vernon.

He believes that there are four stages involve in production cycle:-

1) Introduction:- New product are introduced in the market to meet the need of customers and export in the country who have similar needs and preference.

2) Growth:- The product become widely known and varioos competitor enter into market with their own version. Usually they offer cheaper price goods to attract customer but company who have original product is still increase Its promotional spending.

3) Maturity:- There is intense competition in the market. And therefore the price of the product is at its lower level. The industry contracts and concentrates and the lowest cost manufacturer will win.

4) Decline:- The market become saturated and the sales of the product is decline and product become unpopular. The product get hard but natural end.

But still the product get survive in the market if their manufacturer introduce some new innovation in the product.