Question No.

-1
Why is comparative cost theory considered as an improvement upon absolute
cost advantage theory?
Explain porters diamond model.

Answer
Comparative Cost TheoryDavid Recardo in his notable book Principals of Political Economy published in
1817 came up with an improvement on Adam Smiths absolute advantage
theory. Recardo argued what might happen if one country has absolute
advantage in the production of all goods. Adam Smiths theory suggests that
such a country might not have benefited from international trade as trade is
positive sum game and countries prosper only if they exchange the good in
which they have absolute advantage.
Recardo argued that it was not the case and showed that countries should trade
goods with each other where they have comparative cost advantage. For a
sustainable economic system, Recardo argued that a country should specialised
in the production of those goods that it can produce most efficiently and import
the goods which it produces less efficiently even if it has absolute cost
advantage in the production of those goods.
Porters Diamond ModelIn 1990 Michael porter analysed the reason behind some nations success and
other failure in international competition. His thesis outlined four broad attributes
that shape the environment in which local firms compete and these attributes
promote the creation of competitive advantage. They are explained as follows

Factor Endowments- Characteristics of production were analysed in detail.

There are basic factors like natural resources, climate, and location and so on
and advanced factors like communication infrastructure, research facilities.

Demand Conditions- The role of home demand in improving competitive

advantage is emphasised since firms are most sensitive about the needs of
their closest customers. For example the Japanese camera industry which
caters to a sophisticated and knowledgeable local market.

Relating and Supporting Industries- The presence of supplier or relative

industries is advantageous since the benefits of investment in advanced
factors of production spill over to these supporting industries. Successful
industries within a country tend to be grouped into clusters of related
industries. For example Silicon Valley.

Firm Strategy, Structure and rivalry- Domestic rivalry creates pressure to

innovate, improve quality, and reduce costs which in turn helps create world
class competitors.

He said that these four attributes constituted the diamond and he argued that
firms are most likely to succeed in industries where the diamond is most
favourable. He also stated that the diamond is a mutually reinforcing system and
the effect of on attribute depends on the state of others. For example favourable
demand conditions will not result in a competitive advantage unless the state of
rivalry is enough to elicit a response from the firms.

Question No.-2
Explain Hofstedes cultural dimensions.

Answer