Absolute advantage theory was first presented by Adam Smith in his book “The Wealth of Nations” in 1776. Smith provided the first concept of a nation’s wealth. Adam Smith is a grandfather of economics because he introduced two important concepts that many of the new trade theories are based on these two main concepts, which are specialization and free exchange. However, many arguments were made and many economists thought there was a problem with the theory of absolute advantage after David Ricardo published the theory of “comparative cost” (aka “comparative advantage”) in the early 19th century. Even though Smith and his followers introduced many important points for the thoughts of economic, it is too complicated with this simple version of trade theory in today’s global economy. In 1990, Michael Porter introduced the diamond model of new competitiveness theory. These three trade theories are important in order to make a country Continue reading
International Economics
Multinational Corporations (MNCs) – An Overview
Multinational Corporations (MNCs) are businesses that extend outside of their own country, whether they are located throughout the world or only in a couple other countries, they are considered multinational. The value adding activities which are owned by these companies are used to produce tangible goods or intangible services or the combination of both. There are many reasons as to why firms become multinational and there are various strategies for a firm to become multinational. The immediate motives of the Firms can be to expand business, to seek new market, or for additional profits and revenues. It may also be to concentrate on the economics of scale that a larger international demand can bring. The motive behind market seeking activities is strong among firms who have some advantage related to technology or brand which gives them a competitive advantage over domestic rival. Another reason for firms to become multinationals is Continue reading
Poverty Trap
Poverty trap is a situation where an unemployed person receiving social security benefits not encouraged to seek work because his or her after €tax earnings potential in work is less than the benefits currently obtained by not working. The poverty trap occurs due to benefits such as income support, housing benefit, single parent allowance and family tax credit. Given that social security benefits represent the ‘bottom line’ (that is, the provision of some socially and politically ‘acceptable’ minimum standard of living), the problem is how to reconcile this with the ‘work ethic’. For example, consider the case of a low-skilled person in the UK. He is unable to get a high-paid job because he doesn’t have the right skills, training or experience. He has two options. First one is to get a low-paid job or second option is to claim unemployment benefits. If he gets a low paid job he Continue reading
Methods of Internationalization
In the process of globalization, a firm operates their activities globally and the internationalization process is one of the primary sites of attention. The changes in the technology in the fields of telecommunications and computer lessen the costs of cross border operations and encourage firms to engage in transnational production activities. Internationalization is a sequential process where firms internalize their economic activities characterized in terms of aggressiveness and motivated by either internal or external triggers or a combination of both. It is one of the key strategic decisions for firms to maximize or at least sustain profits to survive in the world of uncertainty and complexity. The global economic expansion has been largely facilitated by the growth of TNCs. They dominate world trade and capital movement with turnover exceeding the GNP of some countries. These corporations continue to grow and influence the landscape of the world economy. Once a firm Continue reading