Page 37 - International Marketing

NPP

BRILLIANT'S Introduction to International Marketing 39

producing wine. This can be verified from the fact that 80/120 (relative cost
of wine) < 90/100 (relative cost of cloth). In the absence of trade, the
domestic exchange ratio which will reflect the relative costs of production
of the two commodities, will be:
Portugal - 1 wine : 0.89 cloth
U.K.- 1 wine : 1.20 cloth.
Now, if trade takes place, assuming zero transport cost and no other
incidence, the trader in Portugal will find that, while by exchanging one
unit of wine, they can get only 0.89 of cloth domestically, they can get
1.20 units of cloth, if the same one unit of wine is sold in the U.K. There is,
therefore, a gain which can be derived from export of wine from Portugal,
as a result of which Portugal will specialize in the production of wine and
export it to the U.K. On the contrary, traders in the U.K. will find that while
it takes one unit of cloth to get only 0.83 units of wine, they get 1.12 units
of wine by selling the same unit of cloth in Portugal. Therefore, U.K. will
specialize in the production of cloth and export the same to Portugal.
There are certain limitations of Ricardian theory, first, it is one factor
model i.e., labour as a factor of production. In reality, even though labour
cost constitutes an important segment of total cost, there are other cost
elements also which, in some cases can outweigh the labour cost
differences. Secondly, the Recardian theory does not explain the reasons
why labour productivity may differ from country to country. Thirdly, it ignores
product and program differentiation. A company's ability, to compete in
international market is determined by the actual product and product
differentiation and the effectiveness of the company's customer offering in
relation to competitive offerings. For example, demand for the Mercedes
and other luxury products is so great that customers are prepared to pay
a significant price differential to obtain what they perceive as a unique
product.
3. The Factor Endowment Theory
The principles of absolute and comparative advantage provide a pri-
mary basis for trade to occur, but the usefulness of these principles is
limited in their assumptions. Thus to overcome these limitations, the Fac-
tor Endowment Theory (Factor Proportion Theory) was developed by
Heckscher and Ohlin. This theory was further developed by Samuelson.
This theory is basically a two-country, two- commodity and two-factor