The Economic Environment

Page 1 of 10

The Economic Environment

By | June 2010
Page 1 of 10
UNIT 4 The Economic Environment
This Unit covers the second of the PESTLE elements

LEARNING OUTCOMES
The application of trade theory to explain the benefits of engaging in International Trade

Economic Implications of a country’s membership of a trading bloc for a business
Compare the various types of Foreign Direct Investment (FDI) and analyze how they may affect the various countries involved as well as the businesses within these countries

INTERNATIONAL TRADE THEORY
Four Theories of International Trade are:

Absolute Advantage

Product Life-cycle Theory

New Trade Theory

Porter’s determinants of National Competitive Advantage

MERCANTILIST THEORY
States that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports.

Aim is to maximize exports and minimize imports.

Rest on the idea that if one country gained, then another must lose.

MERCANTILIST THEORY
Problems :
This theory excludes the fact that in some cases it is good to import.

By discouraging import the population will have to do without certain consumer items.

ABSOLUTE ADVANTAGE
This concept is generally attributed to Adam Smith .
Refers to the ability of a country/firm to produce greater output of a good or service than other countries/firms using the same amount of resources. Smith argued that a country should specialize in producing those goods/services for which it has an absolute advantage. Countries would benefit/gain if they export only those good/services in which they have an absolute advantage and import those in which other countries have an absolute advantage. ABSOLUTE ADVANTAGE Example

ABSOLUTE ADVANTAGE Example
ABSOLUTE ADVANTAGE
The potential problems with Absolute Advantage lies in the following question:

If there is one country that does not have an absolute advantage in the production of any product, will there still be benefit to trade?

The answer to this question...