1.

Factor Proportions Theory

In the early 1900s, an international trade theory emerged that focused attention on proportion
(supply) of resources in a nation. The cost of any resource is simply the result of supply and demand:
factors in great supply relative to demand with be less costly than factors in short supply relative to
demand.
Factor Proportions Theory states that countries produce and export goods that requires resources
(factors) that are abundant and import goods that require resources in short supply. The theory
resulted from the research of two economist. Eli Hecksher and Bertil Ohlin, and is therefore
sometimes called the Heckscher-Ohlin Theory.

2. International Product Life Cycle Theory

Raymond Vernon put forth an international trade for manufactured goods in mid 1960s. His
International Product Life Cycle Theory says that a company will begin by exporting its product and
later undertake foreign direct investment as the products moves through its life cycle. The theory also
says that, for a number of reasons, a country’s export eventually becomes its import.

Although Vernon developed his model around the United States, we can generalize it to apply to any
developed and innovative market such as Australia, the European Union, and Japan.

3. National Competitive Advantage theory

Michael Porter put forth a theory in 1990 to explain why certain countries are leaders in the
production of certain products. His National Competitive Advantage Theory states that a nation’s
competitive industry depends on the capacity of the industry to innovate and upgrade.
Porter’s work incorporates certain elements of previous international trade theories
but also to make some important new discoveries.

Porter is not preoccupied with explaining the export and import patterns of nations but rather with
explaining why some nations are more competitive with certain industries. He identifies four
elements present to varying degrees in every nation that form the basis of national competitiveness.
The Porter’s Diamond consist of the following:

1. Factor conditions
2. Demand conditions
3. Related and supporting industries
4. Firm strategy, structure and rivalry
 The Practice of Trade Policy
Trade Policy – all government actions that seek to alter the size of merchandise and / or service flows
form and to a country.
Tariffs – taxes on imports; also known as customs duties in some countries.
Custom Duties – taxes on imports that are collected by a designated government agency responsible
for regulating imports.
Import Quotas – also known as Quantitative Restrictions (QRs are regulations that li