This presentation compares the comparative advantage model and product life cycle theory. It explains comparative advantage using the example of England manufacturing cloth more efficiently than Portugal, and Portugal making wine at a lower opportunity cost. It then provides examples of oil producing nations having an advantage in chemicals, and India's advantage in call centers. The presentation defines the product life cycle theory, noting products are initially developed and sold in the US then production shifts overseas, with the US eventually importing products. It outlines the six stages and provides photocopiers as an example matching this pattern.

1. Presentation Title:
Comparative Advantage Model and Product Life Cycle Theory
Prepared by:
Esmatullah Mohammady (17MBA1079)
Presenters: Group 2
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

2. Comparative Advantage Theory
Eighteenth-century economist David Ricardo created the theory of comparative advantage. He
argued that a country boosts its economic growth the most by focusing on the industry in
which it has the most substantial comparative advantage.
“Comparative advantage is when a country produces a good or service for a
lower opportunity cost than other countries.”
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

3. “For example, England was able to manufacture cheap cloth. Portugal had the right conditions
to make cheap wine. Ricardo predicted that England would stop making wine and Portugal
stop making cloth. He was right. England made more money by trading its cloth for
Portugal's wine, and vice versa.”
In this illustration, England could commit 100 hours of labor to produce one unit of cloth, or
produce 5/6 units of wine. Meanwhile, in comparison, Portugal could commit 90 hours of
labor to produce one unit of cloth, or produce 9/8 units of wine.
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

4. Examples (1)
Oil-producing nations have a comparative advantage in chemicals. Their locally-
produced oil provides a cheap source of material for the chemicals when compared to
countries without it. A lot of the raw ingredients are produced in the oil distillery process.
As a result, Saudi Arabia, Kuwait, and Mexico are competitive with U.S. chemical
production firms. Their chemicals are inexpensive, making their opportunity cost low.
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

5. Another example is India's call centers. U.S. companies buy this service because it is cheaper
than locating the call center in America. Indian call centers aren't better than U.S. call centers.
Their workers don't always speak English very clearly. But they provide the service cheaply
enough to make the tradeoff worth it.
Examples (2)
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

6. The Product Life Cycle Theory
• Ramond Vernon proposed product life cycle theory in 1960
• His observation was that large proportions of the new products were developed by US
firms and sold in US market, e.g. Televisions, instant cameras, photocopiers, personal
computers, etc. Vernon argued that most new products were initially produced in the
United State.
• This theory argues that product development used to start in USA and over time,
manufacturer starts to sell that product in other countries and gradually shifting their
production facilities overseas and then start exporting those products back to the USA.
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

7. Stages in Product Life Cycle Theory
In product life cycle theory there is six stages involved:
First Stage: Product Development
Second Stage: Sales in own country
Third Stage: Limited sale in another countries
Forth Stage: Regular exports from parent country
Fifth Stage: Production in foreign country
Sixth Stage: Export to parent country
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)

8. Let us take the case of photocopiers, the product was first developed in the early 1960s by Xerox
in the United States and sold. Initially, Xerox exported photocopy machines from US, primarily
to Japan and the advanced countries.
As demand began to grow in foreign countries, Xerox entered into joint ventures to set up
production in Japan (Fuji-xerox), India (Modi-xerox), etc. As a consequence, exports from US
declined, and the US users started importing some of their photocopiers from lower-cost foreign
countries, particularly Japan. This evolution in the pattern of foreign trade is consistent with the
product life cycle theory.
Example of product life cycle theory
Prepared by ----------------------------------------------- Esmatullah Mohammady (17MBA1079)