Question

1.3 International business, as a specialised field and discipline, is based on five different theories. Identify two (2) of these theories and share your

view on their relevance in the current turbulent and volatile international domain.

Answer 1

The two theory which led to the globalization was Absolute advantage theory and the comparative advantage theory of international business.

Absolute advantage theory: This theory explains the capacity build by the nation to create a specif type of product or service faster, more and more efficiently than any other country and the company builds the specialization capability over time and becomes further efficient and cost-efficient. This helps the country to become the exporter of that particular service or product all over the world.

Comparative advantage theory: This theory based on the fact that the country produces that specific product or service at less opportunity cost when compared to other products that it can produce. This gives the country a comparative advantage and the company exports the product which it can produce more efficiently and imports the product which it can not produce efficiently and at lower opportunity cost.

During this crisis of COVID-19 this will become more relevant as with a decrease in purchasing power parity of customers and to improve the consumption and global trade the countries need to focus on these two theories of the absolute and comparative advantage and focus on products and service they can produce more efficiently and become more and more specialized and cost-efficient and export such product and service to other countries, while for the product which they can not produce at a very cost-effective manner, those products should be imported. This will keep the consumption going on and inflation will be under control. This will help the people to maintain the consumption level and keep the economy going on.