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CA Foundation · Business Economics · International Trade

The Product Life Cycle theory of international trade, associated with Raymond Vernon, suggests that:

The Product Life Cycle theory holds that an innovating country first produces and exports a new product. As the product matures and becomes standardised, production shifts to lower-cost countries, which may eventually export it back to the innovator.

  1. AA new product is first produced and exported by the innovating country, and production later shifts to lower-cost countriesCorrect
  2. BA product is always produced in the country with the largest population
  3. CTrade arises only because of differences in climate
  4. DGovernments should ban imports of new products

Explanation

Vernon argued that new products are introduced in the innovating, usually advanced, country, which exports them. As the product matures and standardises, production moves to lower-cost countries, which may then export it back. The other options do not describe this theory.

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