Individual Assignment

Name: Jagannath Saha

ID: 1722075
Section:01
Course Code: INB302
Assignment Topic: Country Size and Similarity Theory

Theory of Country Size:

The theory of absolute advantage does not deal with country-by-country differences in
specialization; however, some recent research based on country size helps to explain how much
and what type of products will be traded. Variety of Resources The theory of country size holds
that because countries with large land areas are more apt to have varied climates and natural
resources, they are generally more nearly self-sufficient than smaller countries. Most of the very
large countries such as Brazil, China, India, the United States, and the former Soviet Union
import much less of their consumption and export much less of their production than small
countries such as Iraq, the Netherlands, and Iceland.5Although this relationship generally holds
true, there are exceptions. Albania, for example, is a small country for which trade is a small
percentage of national income because of its stringent restrictions on trade. Transport Costs
Although the theory of absolute advantage ignored transport costs, these costs affect large and
small countries differently. Normally, the farther the distance, the higher are the transport costs,
and the average distances for trade are higher for large countries. Assume, for example, that the
normal maximum distance for transporting a given product is 100 miles because, beyond that
distance, prices increase too much. Most of the production and market in the United States are
more than 100 miles from the Canadian or Mexican borders. In the Netherlands, however, almost
the entire production and market are within 100 miles of its border. Transportation costs thus
make it more likely that small countries will trade.

Country Similarity Theory:

This theory describes the idea that countries with comparable qualities are mainly likely to trade
with each other. These qualities might include the level of development, savings rates, and
natural resources, among others.
The country similarity theory is based on the following principles:
  If two countries have related require patterns, then their customers would claim the same
goods with alike degrees of value and superiority.
 Since the majority of products are developed on the required patterns in the domestic
market, other countries with related require patterns due to a cultural or economic
comparison would be their normal trade partners.
 Countries with the proximity of geological locations would also have better trade
compared to the far-away ones.
In contrast to classical, country-based trade theories, the category of modem, firm-based theories
emerged after World War II and was developed in large part by business school professors, not
economists. The firm-based theories evolved with the growth of the multinational company
(MNC). The country-based theories couldn’t adequately address the expansion of either MNCs
or intra industry trade, which refers to trade between two countries of goods produced in the
same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-
Benz automobiles from Germany.
Most trade today occurs among it seems that related countries –
 Same per-capita income
 Comparable communications/allocation systems
 Same language / traditions / belief / tastes etc.
Similarity among countries on the above aspects allows their products and services to be sold
without difficulty in each other’s markets. Unlike the country-based theories, firm-based theories
incorporate other product and service factors, including brand and customer loyalty, technology,
and quality, into the understanding of trade flows.
This theory is often most useful in understanding trade in goods where brand names and product
reputations are important factors in the buyers’ decision-making and purchasing processes.
Therefore, the country similarity theory consists of the value that the majority of trade in
manufactured goods should be between nations with comparable per capita income and that intra
manufacturing trade in manufactured goods should be universal.

Positive and Negative Aspects/Limitation of these theory:

In Country Size Theory:

 Country size varies.
 Country by country differences in specializations.
 Neglected transport cost.
 Exchange rates are stable and fixed.
 Labor can switch between products easily with same efficiency which is not possible.
In country similarity theory:
Trading partners are affected by- Cultural similarity, Political relations between countries,
Economic Agreements, Distance, Degree of industrialization, Per capita income,
Communications and transportation systems, Degree of technology.