Which trade theory contends that a country that initially develops and exports a new product may eventually become an importer of it, and may no longer manufacture the product:
|a. Theory of factor endowments|
b. Theory of overlapping demands
c. Economies of scale theory
d. Product life cycle theory
The Correct Answer Is:
d. Product life cycle theory
Correct Answer Explanation: d. Product Life Cycle Theory:
The Product Life Cycle Theory, developed by Raymond Vernon in the 1960s, posits that the life cycle of a product goes through various stages: introduction, growth, maturity, and decline.
According to this theory, a country that initially develops and exports a new product may eventually become an importer of it as the product progresses through these stages.
In the introduction stage, a new product is typically developed and introduced into the market by a single country, often the one where the innovation originated. This country has a competitive advantage in producing and exporting the product due to its innovation and early-mover advantage.
As the product gains popularity and demand grows, production starts to expand, and other countries may begin to adopt and produce similar products.
During the growth stage, production increases, and other countries may start to enter the market, aiming to capture a share of the growing demand. The exporting country may still maintain a comparative advantage in producing the product, but competition begins to intensify.
As the product reaches the maturity stage, competition further intensifies, and more countries enter the market. At this point, the initial exporting country may start facing challenges from lower-cost producers in other nations.
The product becomes standardized, and price competition becomes more significant. As a result, the initial exporting country may start importing the product from other countries with lower production costs.
Finally, in the decline stage, the product experiences a decrease in demand due to market saturation or changing consumer preferences. Production may decrease, and the original exporting country may transition to becoming a net importer of the product, sourcing it from countries with more competitive production capabilities.
Why Product Life Cycle Theory is the Correct Answer:
The Product Life Cycle Theory aligns with the scenario described in the question, where a country initially develops and exports a new product but eventually transitions to importing it.
This theory accurately explains how the life cycle of a product affects a country’s role in its production and trade.
Why the Other Answers are Incorrect:
a. Theory of Factor Endowments:
The Theory of Factor Endowments, also known as the Heckscher-Ohlin theory, focuses on the idea that countries will export goods that utilize their abundant factors of production.
It does not address the concept of a country transitioning from being an exporter to an importer of a specific product over its life cycle.
b. Theory of Overlapping Demands:
This theory, which is not a widely recognized trade theory, does not pertain to the scenario described.
It does not provide an explanation for a country’s transition from being a producer and exporter to an importer of a specific product.
c. Economies of Scale Theory:
Economies of Scale theory emphasizes the cost advantages that large-scale production can bring.
While it may impact a country’s competitiveness in producing a particular product, it does not address the specific scenario outlined in the question, where a country shifts from exporting to importing a product due to the product’s life cycle stages.
In conclusion, the Product Life Cycle Theory provides a comprehensive and accurate explanation for the scenario described, making it the correct answer in this context. The theory elucidates how a product’s life cycle stages can influence a country’s role in its production and trade relationships.