New Trade Theory (NTT) suggests that comparative advantage may not necessarily be the most critical factor...
New Trade Theory (NTT) suggests that comparative advantage may not necessarily be the most critical factor in determining to NTT, what factor is most important to explain international trade pattenrs?
1. Absolute Advantage
2. Economic distance to major international markets
3. Increasing returns to scale
4. Size of the domestic market
Homework Answers
Correct answer is :
3. Increasing returns to scale.
NTT believes that economies of scale and network effects that occur in key industries determine patterns in international trade.
Eg. Silicon Valley- Success of major companies like Hewlett and Packard attracted more IT industries, it had network effects and valley IT business flourished.
Absolute advantage has limitations on international trade as country should specialise completely. Domestic market size is important but is not most important for international trade patterns as competitive products can enter into the market.
Distance is getting less importance due to development of better logistics facilities.
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