Introduction to International Business - Essay Example

International trade and world output Free international trade facilitates the countries to specialize in the manufacture of the different goods based on the comparative cost advantage and the economies of scale due to various factors such as favorable climatic conditions, availability of raw materials, manpower and geographical location. The markets would be efficient on the global scale if there is free trade and there are no restrictions placed by the governments on the movement of goods by way of customs duties, taxes and quotas.

When the world is moving towards this ideal situation, on its way the efficiency in the global markets will result into increased world output, depending upon the progress. However, various factors such as the need for protecting the agriculture and local industries, the goal of self-sufficiency, balance of payments situation and phase of the economic development of the country dictates the policies to be pursued by the governments. The world output is related to international trade, and for example during the times of depression, trade will contract on account of reduction in spending in general by the consumers, consequently the world output; and the revival in consumer spending will emerge when the consumer confidence increases once the recessionary pressures are over.

However, the disadvantages due to poor infrastructure have an adverse impact on the economic development in the developing and the underdeveloped countries, and consequently on the international trade. Rich (1992, P. 10) states that there is the problem of the emerging and developing countries who confront the advanced countries with the disadvantage of lacking sufficient industry and infrastructure to compete, yet competition is the means by which they can develop their industrial basis and gain the technology for raising their standards of living.   2. Broad pattern of international trade underpin There are several models for predicting the patterns of trade.

For example, comparative advantage which leads to specialization is based on the theory propounded by David Recardo. However, this Ricardian model of comparative advantage could be neutralized by several factors such as transportation costs and trade costs. Also, the increase in one or more of the components of the cost over a period of time could act as a barrier. Moreover, monetary policies pursued by the government takes into account the factors such as the overall balance of payment position, interest rates and inflation which may have a bearing on the comparative advantage (or disadvantage).

This theory is also criticized on account of its assumption about the labor as the critical input. Also, the comparative advantage could be vitiated by the protectionist measures of the other countries. Theories such as ‘New Trade Theory’ and ‘Gravity model of trade’ are based on empirical analysis compared to the earlier theoretical models. The continuous shift in comparative advantage with reference to various products makes the international trade very dynamic and the pattern and the basis for the balance of trade in goods and services undergo changes over the period of time.

Proudman and Redding (1998, p. 19) state: Theoretical models of growth and trade suggest that patterns of international specialisation are inherently dynamic and evolve endogenously over time. Economic theory pin-points some forces that leads to