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Questions and Answers
What is a characteristic of intra-industry trade?
What is a characteristic of intra-industry trade?
What is a key feature of monopoilistic competition?
What is a key feature of monopoilistic competition?
What determines the pattern of trade according to the ITI MMV trade theory?
What determines the pattern of trade according to the ITI MMV trade theory?
What is a benefit of economies of scale?
What is a benefit of economies of scale?
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What is a potential consequence of trade policies?
What is a potential consequence of trade policies?
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What is a goal of trade policies according to the ITI MMV trade theory?
What is a goal of trade policies according to the ITI MMV trade theory?
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What can lead to increased product variety and lower prices?
What can lead to increased product variety and lower prices?
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What can firms achieve by producing for the international market?
What can firms achieve by producing for the international market?
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What is the primary reason for the exchange of similar products between countries in intra-industry trade?
What is the primary reason for the exchange of similar products between countries in intra-industry trade?
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Which of the following industries is an example of intra-industry trade?
Which of the following industries is an example of intra-industry trade?
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What is the result of economies of scale in intra-industry trade?
What is the result of economies of scale in intra-industry trade?
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What is the purpose of the Grubel-Lloyd Index (GLI)?
What is the purpose of the Grubel-Lloyd Index (GLI)?
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What is a benefit of intra-industry trade for consumers?
What is a benefit of intra-industry trade for consumers?
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What is the term for the change in intra-industry trade resulting from a change in trade policy or other factors?
What is the term for the change in intra-industry trade resulting from a change in trade policy or other factors?
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What is a characteristic of firms that engage in intra-industry trade?
What is a characteristic of firms that engage in intra-industry trade?
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What is the primary effect of intra-industry trade on the quality of products?
What is the primary effect of intra-industry trade on the quality of products?
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Study Notes
ITI MMV Trade Theory
Intra-industry Trade
- Refers to the exchange of similar goods or services between countries
- Examples: Germany exports BMWs to the US, while the US exports Fords to Germany
- Intra-industry trade is driven by differences in consumer preferences and availability of varieties
- It leads to increased product variety, improved quality, and lower prices
Monopolistic Competition
- A market structure in which many firms compete with each other, but each firm has some degree of market power
- Firms differentiate their products through branding, advertising, and quality differences
- Monopolistic competition leads to inefficient allocation of resources, as firms produce at a scale that is smaller than the minimum efficient scale
- ITI MMV trade theory assumes that firms operate in a monopolistically competitive market structure
Factor Endowments
- Refers to the quantity and quality of factors of production (labor, capital, natural resources) available in a country
- Countries tend to export goods that intensively use their abundant factors and import goods that intensively use their scarce factors
- Factor endowments influence the pattern of trade, as countries specialize in the production of goods that use their abundant factors
Economies Of Scale
- Refers to the cost advantages that firms can achieve by producing at a larger scale
- Economies of scale lead to lower average costs and increased competitiveness
- ITI MMV trade theory assumes that firms can achieve economies of scale by producing for the international market
- Economies of scale are a key driver of intra-industry trade, as firms can produce a variety of goods at a lower cost
Trade Policy
- Governments can influence the pattern of trade through trade policies such as tariffs, quotas, and subsidies
- Trade policies can be used to protect domestic industries, but they can also distort the pattern of trade and lead to inefficiencies
- ITI MMV trade theory suggests that trade policies should aim to promote competition and increase efficiency, rather than protecting specific industries
- Trade agreements, such as free trade agreements, can reduce trade barriers and increase the gains from trade
ITI MMV Trade Theory
Intra-industry Trade
- Characterized by exchange of similar goods or services between countries
- Driven by differences in consumer preferences and availability of varieties
- Examples: Germany exports BMWs to the US, while the US exports Fords to Germany
- Leads to increased product variety, improved quality, and lower prices
Monopolistic Competition
- Market structure with many firms competing, each with some degree of market power
- Firms differentiate products through branding, advertising, and quality differences
- Leads to inefficient allocation of resources, as firms produce at a scale smaller than the minimum efficient scale
- Assumed market structure in ITI MMV trade theory
Factor Endowments
- Quantity and quality of factors of production (labor, capital, natural resources) available in a country
- Countries tend to export goods that intensively use their abundant factors and import goods that intensively use their scarce factors
- Influence the pattern of trade, as countries specialize in production of goods using abundant factors
Economies of Scale
- Cost advantages achieved by producing at a larger scale
- Lead to lower average costs and increased competitiveness
- Key driver of intra-industry trade, as firms can produce a variety of goods at a lower cost
- Assumed in ITI MMV trade theory, as firms can achieve economies of scale by producing for the international market
Trade Policy
- Governments can influence trade through tariffs, quotas, and subsidies
- Trade policies can protect domestic industries, but can also distort trade and lead to inefficiencies
- Aim of trade policies should be to promote competition and increase efficiency
- Trade agreements, such as free trade agreements, can reduce trade barriers and increase gains from trade
Intra-Industry Trade (IIT) in ITM
Definition
- IIT refers to the exchange of similar products between countries, often involving both countries importing and exporting the same type of goods.
Characteristics
- IIT occurs within an industry, rather than between industries.
- It involves the exchange of differentiated products, which are similar but not identical goods.
- IIT is associated with economies of scale, product differentiation, and monopolistic competition.
Examples
- The automotive industry, where countries import and export different models of cars.
- The clothing industry, where countries import and export different brands and styles of clothing.
Causes of IIT
- Economies of scale: Firms reduce average costs by producing large quantities of a single product, making it economical to export.
- Product differentiation: Firms produce differentiated products to cater to different consumer preferences, leading to trade in similar products.
- Monopolistic competition: Firms have some degree of market power, allowing them to differentiate their products and engage in IIT.
Benefits of IIT
- Increased variety: IIT allows consumers to access a wider range of products and brands.
- Improved quality: Firms are incentivized to improve product quality to compete with foreign firms.
- Increased competition: IIT promotes competition, leading to lower prices and higher productivity.
Measurement of IIT
- Grubel-Lloyd Index (GLI): A widely used measure of IIT, which calculates the proportion of IIT to total trade.
- Marginal Intra-Industry Trade (MIIT): A measure of the change in IIT resulting from a change in trade policy or other factors.
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Test your knowledge on International Trade and Monopolistic Competition, including intra-industry trade and its benefits.
