International Trade Theory the Decision

International Trade Theory

The decision has been made to open a business in the country of India. The business would be exporting video games to the general public residing there. In order to justify such a decision this report will use the International Trade Theory which in essence is explained in various methods in this report.

Arthur Bloomfield, noted economist, states that "the history of economic thought has long been the subject of considerable controversy regarding its usefulness as an academic discipline and as a field for serious study and research" (Bloomfield 1994-page 20). If that was to be held as true, then using the theory as a justification to invest in India would, at the least, be controversial at first glance.

However, such justification would be deemed entirely plausible if there were a further discernment of Bloomfield's belief as evidenced by this statement; "Bloomfield shares the view those who insist that the history of economic thought is absolutely essential in the training and continuing education of economists" (James 1994-page 606).

To use that education as a block in the foundation of the decision, according to Bloomfield, is an intelligent thing to do. The education concerning international trade theory would show that there are certain aspects that the board should consider a number of different items in making this decision including innovative activity, cost factors; such as production, distribution etc., and usage of the product. Public policy should also be taken into account.

One study shows; "Factor endowment also plays a role in these models. In particular, a wide body of literature ties innovative activity to relative factor cost levels" (http://emlab.berkeley.edu/users/visfac/e280a_sp02/syllabus280a.pdf).

Others studies showed similar findings. In fact, since the early 1980's the international trade theory has challenged for supremacy the old theories of trade that espoused such findings that similar countries would not do well in trade one with another.

This has proven to be the exact opposite than what was earlier predicted. The same study quoted above states, "if innovators are responsive to relative factor costs, innovative activity may be directed towards those sectors with heaviest usage of the most expensive factors of production in an economy" (http://emlab.berkeley.edu/users/visfac/e280a_sp02/syllabus280a.pdf).

According to the international trade theory, since the country of origin is comparable to the country in which the new business will be founded, then the cost factors of doing business will be relatively the same based on the amount of trade available between the two entities.

What must also happen is a study of the usage factors on video games compared to the cost factors associated with production of the product, including distribution and shipping costs.

Other issues studied in order to come to a more complete and effective decision on creating a business in India were factors such as; policy issues between the two countries, exchange rates, and interest rates all according to the international trade theory.

The international trade theory states that all financial aspects of a venture such as the one being proposed here be studied in detail before embarking on such a proposal as the one being espoused in this paper.

Policy issues can have a deadening effect on business ventures or can buoy them up as a cork in the sea. "Policy issues attract a substantial attention from both economists and policymakers in the recent years" (Obsteldt). With such attention being focused on the policy issues, it makes more than a little sense, to focus the attention there as well in order to have a higher likelihood of success than without the same attention. In order to focus attention on those policy issues it must be understood what those policy issues entail.

Those issues can include such items as exchange rates, currency crises and other financial events taking place in either country. The MIT study stated other components should also be addressed. "These include theory and evidence of exchange rate-based stabilizations....sovereign debt management and reform of the international financial system" (Obsteldt). Since there is currently no major problems between the two countries, both countries participate in the World Monetary Fund as active members, and neither country is mismanage their debt management, it would seem that both countries would benefit from more trade between the two entities, which would also lead to the assumption that a business entity would also benefit from the same factors.

Reform of the international financial system was really not a major factor in this study since it has already been reformed in previous years. To reform the system again in order to facilitate a common financial foundation between the two countries does not make a lot of sense at this particular time.