ALMIRA CADENA OMBAC

BS BUSINESS ADMINISTRATION – OPERATIONS MANAGEMENT

1. What international trade theories differentiate between comparative and absolute

advantage?
International trade theories are simply different theories to explain international trade. Trade is the concept
of exchanging goods and services between two people or entities. International trade is then the concept
of this exchange between people or entities in two different countries. People or entities trade because
they believe that they benefit from the exchange. They may need or want the goods or services. While at
the surface, this may sound very simple, there is a great deal of theory, policy, and business strategy that
constitutes international trade.

• Absolute advantage and comparative advantage are two concepts in economics and international
trade.
• Absolute advantage refers to the uncontested superiority of a country or business to produce a
particular good, better.
• Comparative advantage introduces opportunity cost as a factor for analysis in choosing between
different options for production diversification.
• Economist Adam Smith helped develop the concepts, suggesting that countries can specialize in
goods they can produce efficiently and trade with others for goods they can't produce nearly as
well.
• David Ricardo built on Smith's concepts by introducing comparative advantage, saying countries
can benefit from trade even when they have absolute advantage in producing everything.

The idea of absolute advantage was developed by Scottish economist Adam Smith, who explained how
countries can profit by only specializing in the goods and services they can produce efficiently. Smith
suggested that countries can open trade with others for products they can't make efficiently on their own.
The concept is often contrasted with comparative advantage, which was explored after Smith by
economists like David Ricardo. He suggested that countries produce goods and services not necessarily
at a greater volume or quality but at lower opportunity costs. Although these ideas have evolved since
they were first developed, the fundamental basis is still prevalent in production and international trade
today.

The difference between these two theories is subtle. Comparative advantage focuses on the relative
productivity differences, whereas absolute advantage looks at the absolute productivity.

References:
https://www.investopedia.com/ask/answers/033115/what-difference-between-comparative-advantage-and-
absolute-advantage.asp
https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html
2. Which international trade theory originated in the marketing field?

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct
stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that
production of the new product will occur completely in the home country of its innovation.

• A product's life cycle is the amount of time a product goes from being introduced into the market
until it's taken off the shelves.
• There are four stages in a product's life cycle—introduction, growth, maturity, and decline.
• A company often incurs higher marketing costs when introducing a product to the market but
experiences higher sales as product adoption grows.
• Sales stabilize and peak when the product's adoption matures, though competition and
obsolescence may cause its decline.
• The concept of product life cycle helps inform business decision-making, from pricing and
promotion to expansion or cost-cutting.

The product life cycle is important because it informs management of how its product is performing and
what strategic approaches it may take. By being informed of which stage its product(s) are in, a company
can change how it spends resources, which products to push, how to allocate staff time, and what
innovations they want to research next.

Countless factors can affect how a product performs and where it lies within the product's life cycle. In
general, the product life cycle is heavily impacted by market adoption, ease of competitive entry, rate of
industry innovation, and changes to consumer preferences. If it is easier for competitors to enter markets,
consumers change their mind frequently about the goods they consume, or the market becomes quickly
saturated. Then, products are more likely to have shorter lives throughout a product life cycle.

This cycle of market introduction, growth, maturity, and decline may vary from product to product—or
industry to industry. However, this cycle informs a company of how to best utilize its resources, what the
outlook of their product is, and how to strategically plan for bringing new products to market.

References:
https://www.investopedia.com/terms/p/product-life-cycle.asp
https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html