Globalization and the MNE.
The term globalization has become very widely used in recent
How would you define it?
Globalization as producing where it is most cost-effective, selling where it is most profitable, and
sourcing capital where it is cheapest, without worrying about national boundaries.
Theory of Comparative Advantage.
Define and explain the theory of comparative
The theory of comparative advantage provides a basis for explaining and justifying international
trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless
information, and no government interference. The theory contains the following features:
Exporters in Country A sell goods or services to unrelated importers in Country B.
Firms in Country A specialize in making products that can be produced relatively
efficiently, given Country A’s endowment of factors of production: that is, land, labor,
capital, and technology. Firms in Country B do likewise, given the factors of production
found in Country B.
In this way the total combined output of A and B is maximized.
Because the factors of production cannot be moved freely from Country A to Country B,
the benefits of specialization are realized through international trade.
The way the benefits of the extra production are shared depends on the terms of trade,
the ratio at which quantities of the physical goods are traded. Each country’s share is
determined by supply and demand in perfectly competitive markets in the two countries.
Neither Country A nor
Country B is worse off than before trade, and typically both are better off, albeit perhaps
Limitations of Comparative Advantage.
Key to understanding most theories is what they
say and what they do not.
What are four or five key limitations to the theory of comparative
Although international trade might have approached the comparative advantage model during
the nineteenth century, it certainly does not today, for the following reasons:
Countries do not appear to specialize only in those products that could be most
efficiently produced by that country’s particular factors of production. Instead,
governments interfere with comparative advantage for a variety of economic and political
reasons, such as to achieve full employment, economic development, national self-
sufficiency in defense-related industries, and protection of an agricultural sector’s way of
life. Government interference takes the form of tariffs, quotas, and other non-tariff
At least two of the factors of production, capital and technology, now flow directly and
easily between countries, rather than only indirectly through traded goods and services.
This direct flow occurs between related subsidiaries and affiliates of multinational firms,