Describe the Classic Theories of International Trade. Which Theories Do You Believe Are Relevant Today?

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Last theory in classical theories is ‘New Trade’ theory. This theory argues that economies of scale are an important factor in some industries for superior international performances. Even in the absence of superior competitive advantages. Some industries succeed best as their volume of production increases. For example, the commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability.

After going through all types of classical theories of international trade, in my opinion, ‘Comparative Advantage’ theory is the most relevant nowadays. It is because even nowadays, we can see this theory is being practiced for example by China and United States. China’s comparative advantage with the United States is in the form of cheap labour. Chinese workers produce simple consumer goods at a much lower opportunity cost. The United States’ comparative advantage is in specialized, capital-intensive labour. American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Specializing and trading along these lines benefits each. On top of that, this theory drives people into those jobs that they are comparatively best at. Plus, wider gaps in opportunity costs allow for higher levels of value production simply by organizing labour more efficiently. The greater the diversity in people and their skills, the greater the opportunity for beneficial trade through comparative advantage.

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5-15 Industrial clusters can be valuable tools for a country’s economy. Identify three global examples and describe their development. Do not choose your own country.

Industrial cluster basically serves as a catalyst for economic growth. What makes clusters unique is not just that companies with similar or complementary interests, competencies, and needs congregate around each other. It’s that an entire value chain exists within a cluster: suppliers, manufacturers, distributors, academic institutions, research.

Among major global example that can be put forth is in the city of Dalton, Georgia which is unrivalled in its production of carpet. Nowadays, almost 90 percent of the functional carpet produces worldwide is made within a 25-mile radius of Dalton. It started after World War II, where there was rapid expansion of new firms started by entrepreneurs and through cooperation among owners, mills and local government. That’s when the carpet industry came to be identified in the region. Following that, entrepreneurs started to developed a new tufting technology and dominated the carpet industry which is previously held by woven-wool carpet manufacturers in Northeast. According to the research, 18 of the largest 35 carpet companies are headquartered in Georgia. The carpet cluster includes the carpet tufting mills, yarn mills, finishers, backing manufacturers, machinery suppliers, maintenance services, and sample companies that directly support the carpet industry. Seventy-five to eighty percent of the yarn used by the carpet industry is produced and processed in Georgia. Over 50,000 employees in Dalton are engaged in carpet manufacturing, and seventy-two interstate trucking companies are utilized to transport carpet and raw materials, in addition to fleets owned by many carpet companies.

Next example of industrial cluster is digital media city in South Korea. In the late 1990s, the Seoul Metropolitan Government in South Korea developed the Digital Media City (DMC), a 135-acre complex, four miles outside of the city's central business district in the Sangam-dong district. With Seoul's rapidly growing cluster of multi-media, IT, and entertainment industries, the Digital Media City, through its vibrant agglomeration, helped to promote these industries and companies whose core business required use of information, communication, and media technologies. DMC grew and prospered as a global business environment, raising Seoul as an East-Asian hub of commerce. The cluster of its digital media-related, high-tech firms spawned partnerships which in turn leveraged both human and social capital in the area. Eventually, DMC fed the innovation of more than 10,000 small-scale Internet, game, and telecommunication firms located in Seoul. In development of DMC, the Seoul government leveraged initial funding by private technology partners and developers. It is also provided IT broadband and wireless networks to the area as well as needed infrastructure. The Seoul government even provided tax incentives and favourable land prices for magnet tenants who would attract other firms to the area due to established business relationships and through their presence which would in turn promote DMC as a prime location. With such a concentration of these entities, Seoul has become a major nexus of high-technology and digital media. It is home to digital media R&D firms across a range of types including cultural media creation, digital media technologies, digital broadcasting centres, technology offices, and entertainment firms. Just outside the DMC complex include international firm affiliates, schools, moderate to low income housing, commercial and convention facilities, entertainment zones, and the city's central rail station. The cohesive connection of industry, cultural centres, infrastructure, and human capital has fostered Seoul as a strong metropolitan economy and South Korea, the Miracle on the Han River, as a storied nation transitioning from a manufacturing to an innovation economy.

Apart from that, Silicon Valley case can also present on industrial clusters. In the mid- to late 1990s, several successful computer technologies related companies emerged in Silicon Valley in California. This led anyone who wished to create a start-up company to do so in Silicon Valley. The surge in the number of Silicon Valley start-ups led to a number of venture capital firms relocating to or expanding their Valley offices. This in turn encouraged more entrepreneurs to locate their start-ups there. In other words, venture capitalists (sellers of finance) and dot-com start-ups (buyers of finance) "clustered" in and around a geographical area. The cluster effect in the capital market also led to a cluster effect in the labour market. As an increasing number of companies started up in Silicon Valley, programmers, engineers etc. realized that they would find greater job opportunities by moving to Silicon Valley. This concentration of technically skilled people in the valley meant that start-ups around the country knew that their chances of finding job candidates with the proper skill-sets were higher in the valley, hence giving them added incentive to move there. This in turn led to more high-tech

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