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What are the differences between the three theories of international business? (Theory of Comparative Advantage -...

  1. What are the differences between the three theories of international business? (Theory of Comparative Advantage - Imperfect Markets Theory - Product Cycle Theory)

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Answer #1

1) Theory of Comparative Advantage -

  • Comparative advantage refers to an economy's ability to produce goods and services at a lower opportunity cost than its trade partners.
  • The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production.
  • Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in.
  • Absolute advantage refers to the uncontested superiority of a country to produce a particular good better.

2) Imperfect Market Theory -

  • Imperfect markets do not meet the rigorous standards of a hypothetical perfectly or purely competitive market.
  • Imperfect markets are characterized by having competition for market share, high barriers to entry and exit, different products and services, and a small number of buyers and sellers.
  • Perfect markets are theoretical and cannot exist in the real world; all real-world markets are imperfect markets.
  • Market structures that are categorized as imperfect include monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies.

3) Product Cycle Theory

  • A product 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.
  • The concept of product life cycle helps inform business decision-making, from pricing and promotion to expansion or cost-cutting.
  • Newer, more successful products push older ones out of the market.
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