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MGT520 - International Business - Lecture Handout 30

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GATT AND WTO

The World Trade Organization:

The World Trade Organization (WTO) was founded in 1995, and is comprised of 146 member countries and 30 observer countries. The WTO has three primary goals: to promote trade flows by encouraging nations to adopt non-discriminatory and predictable trade policies, to reduce remaining trade barriers through multilateral negotiations, and to establish impartial procedures for resolving trade disputes among members.

Problem Sectors:

One challenge facing the WTO is dealing with sectors of the economy such as agriculture and textiles that most nations protect. Groups including the Cairns Group (a group of major agricultural exporters) have pressured the WTO to ensure that the Uruguay Round policies dealing with agricultural trade are implemented according to schedule. Similarly, developing countries are monitoring the dismantling of the Multifibre Agreement (MFA), which created a complex array of quotas and tariffs on trade in textiles and apparel.

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MGT520 - International Business - Lecture Handout 23

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INTERNATIONAL TRADE THEORY

THE FACTOR-PROPORTIONS THEORY:

The Heckscher-Ohlin theory of factor endowment is useful in extending the concept of comparative advantage by bringing into consideration a nation’s endowment and cost of factors of production. The theory holds that a country will tend to export products that utilize factors of production relatively abundant in that nation.

Land-Labor Relationship:

In countries with many people relative to the size of the available land, labor would be relatively (comparatively) cheap; thus those countries should concentrate on producing and exporting labor-intensive goods.

Labor-Capital Relationship:

In countries where little capital is available for investment and where the amount of investment per worker is low, then low labor rates would also be expected. Again, those countries should concentrate on producing and exporting labor-intensive goods. (The fact that labor skills tend to vary across countries has led to international task specialization with respect to national production activities.)

Technological Complexities:

Factor proportions analysis becomes complicated when the same product can be produced by different methods, such as with different mixes of labor and capital. Managers must consider the cost in each locale, based on the type of production that will minimize costs there.

Read more: MGT520 - International Business - Lecture Handout 23