Management Notes

Reference Notes for Management

International trade is based on the idea that:

International trade is based on the idea that:


a. Exports should exceed imports
b. Imports should exceed exports
c. Resources are more mobile internationally than are goods
d. Resources are less mobile internationally than are goods

The Correct Answer Is:

d. Resources are less mobile internationally than are goods

Correct Answer Explanation: d. Resources are less mobile internationally than are goods

International trade is fundamentally rooted in the concept that resources are less mobile internationally than goods.

This principle forms the bedrock of economic theories surrounding comparative advantage, which posits that nations should specialize in producing goods or services that they can produce most efficiently relative to other countries.

This concept is often attributed to the renowned economist David Ricardo and is exemplified by the famous example of England specializing in cloth and Portugal in wine production.

This theory hinges on the idea that factors of production such as land, labor, and capital are less easily moved across borders compared to the finished products themselves.

To delve into why this answer is correct, it’s essential to understand the concept of factor mobility. Resources, including physical assets like factories, skilled labor, and natural resources, as well as intangible assets like intellectual property, tend to be less mobile internationally. This is due to a variety of reasons, including legal, cultural, and infrastructural barriers.

For instance, establishing a factory in a foreign country entails navigating complex legal frameworks, understanding different labor markets and regulations, and adapting to unfamiliar business environments.

Similarly, skilled workers might face visa restrictions or language barriers when seeking employment abroad. This makes the international movement of resources a far more complex and challenging process compared to the movement of finished goods.

On the other hand, goods are generally more mobile due to advances in transportation, communication, and global supply chain networks. Modern shipping and logistics have greatly reduced the cost and time required to transport goods across borders.

Additionally, advancements in technology have facilitated communication and coordination between businesses and suppliers worldwide, enabling the efficient production and movement of goods.

Now, let’s dissect the other options to understand why they are not correct:

a. Exports should exceed imports:

While a trade surplus (where exports exceed imports) can be desirable for a nation in certain circumstances, it is not the foundational principle upon which international trade is based.

Moreover, advocating for perpetual trade surpluses can lead to imbalances in global trade relationships, potentially resulting in retaliatory measures from trading partners.

b. Imports should exceed exports:

This idea contradicts the notion of comparative advantage and specialization. Encouraging imports over exports does not align with the goal of maximizing a country’s economic efficiency and productivity.

Instead, it could lead to underutilization of a nation’s resources and hinder its economic growth.

c. Resources are more mobile internationally than goods:

This option presents an inverted understanding of the reality of international trade. As mentioned earlier, resources are generally less mobile internationally due to various barriers, while goods have become increasingly mobile thanks to advancements in transportation and technology.

In conclusion, the correct answer, option d ( Resources are less mobile internationally than are goods), succinctly encapsulates the core principle that underpins international trade.

The movement of goods across borders is facilitated by modern infrastructure and technology, whereas the international movement of resources remains a more complex and challenging endeavor. This foundational concept allows nations to specialize in what they do best, fostering global economic interdependence and mutual prosperity.

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