Which of the following theories best explains the global dominance of Airbus and Boeing in the global supply of large Airplanes. a Absolute advantage b Comparative Advantage c Factor Proportion’s theory d New Trade Theory
The correct answer and explanation is:
The correct answer is New Trade Theory.
New Trade Theory (NTT) explains the global dominance of Airbus and Boeing in the supply of large airplanes. This theory emerged in the 1980s and focuses on economies of scale, network effects, and the importance of government intervention, which can lead to a small number of firms dominating a particular market.
NTT highlights that, in industries like aerospace manufacturing, high fixed costs and significant investment in research and development (R&D) create a barrier to entry. For companies like Airbus and Boeing, their ability to spread these fixed costs over a large number of units allows them to achieve economies of scale, thus reducing the cost per unit of production. This leads to lower prices and makes it difficult for new firms to compete.
The market for large airplanes is also characterized by network effects. As Airbus and Boeing dominate the market, they create a network of suppliers, partners, and customers that reinforces their competitive advantage. Airlines prefer to buy aircraft from well-established companies because of the availability of parts, servicing capabilities, and training infrastructure.
Moreover, governments play a role in fostering the dominance of these companies by providing subsidies, support, and protectionist policies that encourage their growth. This is especially true for Boeing, which has benefited from U.S. government contracts and support, while Airbus has received backing from European governments.
While other trade theories such as Absolute Advantage, Comparative Advantage, and Factor Proportions Theory focus on different aspects of international trade, New Trade Theory provides the most comprehensive explanation of the dominance of Airbus and Boeing. It takes into account the impact of economies of scale, network effects, and government intervention, which are essential for understanding why these two companies continue to lead the global airplane supply market.