What Is International Trade Theory?

Q1. Is the experience of the United States, as described in the case, consistent with the pattern of international trade? Explain international trade theories and illustrate the pattern of trade with information provided by the case. 1. According to case, United States invented most of the information technology that we use today. In the 1980s, the locus of growth in the sector shifted to personal computers and the innovations of companies like Intel, Apple Inc, or IBM had developed mass market for products.
However, in the early 1990s something happened to this uniquely American industry so as to let the industry has moved to production of commodity components had moved offshore. Later on, this trend might affect the economy in U. S. , but some evidence show that the United States actually benefited from the shift. Thus United States export their product to foreign country to increase the life of product for earning profits continually. Therefore the trade pattern with this international trade is product life cycle.
A product life cycle refers to the time period between the launch of a product into the market till it is finally withdrawn from it. In a nut shell, product life cycle or PLC is an odyssey from new and innovative to old and outdated. This cycle is split into four different stages which encompass the product’s journey from its entry to exit from the market. This cycle is based on the all familiar biological life cycle, wherein a seed is planted (introduction stage), germinates (growth stage), sends out roots in the ground and shoots with branches and leaves against gravity, thereby maturing into an adult (maturity stage).

As the plant lives its life and nears old age, it shrivels up, shrinks and dies out (decline stage). In terms of introduction Stage, it is for the sake of the theory. After conducting thorough market research, the company develops its product. Once the product is ready, a test market is carried out to check the viability of the product in the actual market, before it can set foot into the mass market. Results of the test market are used to make correction if any and then launched into the market with various promotional strategies.
Since the product has just been introduced, growth observed is minimal, market size is small and marketing costs are steep. Thus, introduction stage is an awareness creating stage and is not associated with profits. Regarding to case, the companies of United State in 1960s and 1970s, like IBM and DEC which developed first mainframe and then midrange computers and there is only few awareness. The second stage is the growth stage for a product. Once the introductory stage goes as per expected, the initial spark has been set, however, the fire has to be kindled carefully.
The marketer has managed to gain the consumer’s attention and works on roping in loyal customers. He also works on increasing his product’s market share, by investing in aggressive advertising and marketing plans. He will also use different promotional strategies like offering discounts, etc. to increase sales. As output increases, economies of scale are seen and better prices come about, conducing to profits in this stage. The marketer maintains the quality and features of the product and seeks brand building. The aim here is to coax consumers to prefer and choose this product over those sold by competitors.
As sales increase distribution channels are added and the product is marketed to a broader audience. Thus, rapid sales and profits are characteristics of this stage. In United States case, the computer making company will come up with attractive function and prices in growth stage. Those companies will invest in marketing and promoting the product to increase the awareness of product in customers’ perspective. Customers will learn more about the product qualities and advantages of using this new fabric. If the computer catches on, it will move to the next stage or it will go straight to the decline stage.
The third stage in product life cycle theory is Maturity Stage. This stage views the most competition as different companies struggle to maintain their respective market shares. The cliche ‘survival of the fittest’ is applicable here. Companies are busy monitoring product’s value by the consumers and its sales generation. Most of the profits are made in this stage and research costs are minimum. Any research conducted will be confined to product enhancement and improvement alone. The manufacturer is constantly on the lookout for new ideas, to improve his product and make it stand out among the competitor’s products.
His main aim is to lure non-customers towards his customer base and increase the existing customer base. Since consumers are aware of the product, promotional and advertising costs will also be lower, as compared to the previous stage. In the midst of stiff competition, companies may even reduce their prices in response to the tough times. The maturity stage is the stabilizing stage, wherein sales are high, but the pace is slow, however, brand loyalty develops, thereby roping in profits. In U. S. case, the computer factory in U. S. moves their “commodity components” production to low cost producers in Japan, Tai Wan and Korea in early 1980s.
The high-paying manufacturing jobs in the information technology sector were being exported to foreign producers. The produces based in advanced countries where labor costs were lower than main competitive weapon. Moreover, U. S. has exported the computer to foreign for enhancing the computer lifelong. The production of industry has become concentrated in lower-cost foreign locations, and U. S. became an importer of the product. Q2. During the 1990s and 2000s computer hardware companies in certain developed nations progressively moved the production of hardware components offshore, often outsourcing them to producers in developing nations.
What does international trade theory suggest about the implications of this trend for economic growth in those developed nations? 2. The issues of international trade and economic growth have gained substantial importance with the introduction of trade liberalization policies in the developing nations across the world. International trade and its impact on economic growth crucially depend on globalization. When production of commodity-like components began to shift from the U. S. to low cost locations in the early 1980s, many experts were concerned about potential jobs losses.
And some manufacturing jobs were indeed lost, the lower costs inputs brought prices down, and actually prompted a more rapid diffusion of the technology. It generated greater productivity in the workplace, and a boom in the computer services and software industries, where many new jobs were created. According to international trade theory, developing nations also stood to benefit from the trend as the outsourcing by American companies created new jobs and greater economic growth in those markets. According to international trade theory, developing nations also stood to benefit from the trend as the outsourcing by American companies reated new jobs and greater economic growth in those markets. The price declines in computer hardware that resulted from the lower cost production supported new investments in the industry. Moreover, production of computers began to shift to low cost locations, critics worried that the U. S. economy would suffer. But, there is a report which reported that it is the opposite occurred. Also, diffusion of computers through the U. S. market was faster, allowing companies to use computers to streamline their operations and increase productivity.
Meanwhile, New trade theory and Porter’s diamond of competitive advantage suggest that the success of the U. S. information technology sector is due in part to government policies. A first mover advantages can help a firm dominate global trade in that product. By maintaining policies designed to facilitate growth in the industry, the U. S. can encourage success. The globalization of the production of information technology hardware contributed to lower prices in the industry and the faster diffusion of the technology to businesses and households. In addition, it spawned growth in two related industries – computer software and services.
New trade theory would suggest that government could play a significant role in maintaining these benefits by pursuing policies that allow these trends to continue. To conclude, the impact of international trade on economic growth is concerned, the economists and policy makers of the developed and developing economies are divided into two separate groups. And international trade has brought about unfavorable changes in the economic and financial scenarios of the developing countries. According to them, the gains from trade have gone mostly to the developed nations of the world.