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International Trade Theories






á M

á The mercantilist doctrine advocated
government intervention to achieve a surplus in
the balance of trade.
á
  

á ased on Adam Smith¶s ³The Wealth of Nation´
á A country has an absolute advantage in the
production of a product when it is more efficient
than any other country in producing it.







á › 
 

á According to David Ricardo¶s theory of
comparative advantage it makes sense for a
country to specialize in the production of those
goods that it produces most efficiently and to
buy the gods that it produces less efficiently
from other countries.
á  
 

á The theory of factor endowment.
á
actor endowment means the extent to which a
country is endowed with such resources as
land, labor and capital.
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á Raymod Vernon¶s Theory

á A product develops in a developed nation and
the demand of product is high in the nation but
over time the pressure for cost reduction grows.
á The limited initial demand in other advanced
countries does not make it worthwhile for firms
in those countries to start producing the new
product, but it does necessiate some exports
from the country of development
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á ver time, demand for the new product grows
in other advanced countries.
á It becomes worthwhile for foreign producers to
begin producing for their home markets.
á As the market in these foreign market start to
mature, the product becomes more
standardized and price remains the only
competitive weapon.
á This results in the developing countries to
acquire a production advantage over advanced
countries.
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á roduct life cycle is the course that a product¶s

sales and profits take over its lifetime. It has
following distinct stages
á Introduction
á This is a period of slow sales growth as the
product is introduced in the market.
á rofits are nonexistent in this stage because of
the heavy expenses of product.
á The strategy is to create wide spread
awareness.
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á osts are incurred in building distribution and

increasing awareness through heavy
promotion.
á rowth
á Reaping off the benefit of promotion during the
introduction stage.
á This is a period of rapid market acceptance and
increasing profit.
á Strategy might be cost based, differentiation or
niche market focus.
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á nit manufacturing costs begin to fall as fixed

costs are spread over more production units
and workers move down the learning curve.
á aturity
á A period of slowdown in sales growth because
the product has achieved acceptance by most
potential buyers.
á rofits level off or decline because of increased
marketing outlays to defend the product against
competition.
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á Decline
á A period when sales fall off and profits drop.
á The firm may continue to market the product
hoping that competitors will discontinue their
products.
á Strategies are to maximize profit by eliminating
as many product costs as possible as sales
slow, or else to eliminate the product altogether.




á Introduction: 1964
á erformance increased with the addition of the
428 obraJet in 1968
á ach I styling in 1969
á igh performance oss 351 addition in 1971.
á
uel efficient redesign as ustang II in 1974
á
ourth generation ustang in 1994
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á Design engineering, process engineering,

product marketing, and production recurs at
each stage of  .
á
nd of life of the product should be handled
with care as the product reaches its
obsolescence.
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o



á Design engineering can occur at any stage

(multiple times in each stage).
á The process is extensive, elaborate during the
introduction stage but ³might´ be less extensive
at later stages.
á Idea validation occurs first, they check their
ideas, concept with the market.
.g. if they have
conceptualized a new product or service, they
check if the concept has viability in the market.
á Technology, manufacturing capabilities,
competition, and potential revenues are
analyzed in this stage.
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o




á The second stage is the conceptual design

where the initial investigations are made into
product pricing, performance and styling in a
feasibility analysis.
á Specification and design are the third. This is
the stage the look and feel of the product and
service is developed.
á rototyping is one of the popular method as
constant changes can be done will lesser cost.
á In case of prototyping involves development of
a product representing the subtype of the main
product and is further enhanced.
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o




á nder pilot project concept the product or

service is launched in a test environment and
on the basis of the response, modifications is
done.
á The final stage is commercialization.
á The chief concern is obtaining the desired level
of manufacturing capacity as soon as possible
while meeting quality specifications.
á The purpose of any new product introduction is
to place a quality product in the market, in
desired amounts, at the producing firm¶s lowest
possible cost.
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o




á onstant changes in the product often leads to

the creation of an entirely new product.
á hanges made to the product typically result in
markedly higher quality, new features that
increase the product¶s utility value, and/or
improvements in the attractiveness of the
product through styling.
á Specification and design are the third. This is
the stage the look and feel of the product and
service is developed.
.g. aterpiller¶s high-
drive crawler tractors, windows operating
system.
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o



á The focus of the process engineering is on the

production system (product), delivery and
development (service).
á It defines the functions, system, equipment,
tooling, layout, and flow used in manufacturing
or service operations.
á ill of materials is a list of separate parts that
make up a product/service and gives an idea of
the parts that make up the product and the
process that shall be followed.
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o




á aufer¶s three basic types of process structures:

á Intermittent operations found in custom firms or
job shops in which end item or service
specifications are provided by the customer.
á atch operations found in more standardized
products to be produced in higher quantities.
The production run is longer.
á ontinuous operations with highly standardized
product with limited variety and high output.
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á Just in time approach.

á Automation requirement
á aintenance decision
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á roduction as obvious is when the product or

service is developed for delivery.
á It requires standard processes, required
resources and trained manpower.
á The quality, quantity specifications must be met
during the production stage.
á As sales increase production process speeds
up, overhead per-unit costs decrease and direct
costs increase.
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á anufacturing activity is moderate during initial

stage, leaps through growth, peaks at time
when demand is highest and falls during
decline.
^



á This is where the linkages between the different

stages is studied and analysed.
á The first step is design engineering, followed by
process engineering, production, marketing and
end of life. This is known as the over-the-wall
method of product design and development,
with each stage separate from the next.
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á arketing elements (the 4 s)

Ë c

Ë c 
Ë c

Ë c



á igh advertising budgets
á The focus can be on ³
ntire market´ or the
³niche´
á nce the product becomes established, fewer
advertising cost incurs.
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á Sales promotion to stimulate awareness and

stock clearance.
á ³Sales promotion consists of short-term
incentives to encourage purchase or sales of a
product or service. Whereas advertising offers
reasons to buy a product or service, sales
promotion offers reason to buy now.´
» (Kotler and Armstrong, 1991)