Alternative Theories of Trade PDF

3. Alternative Theories of Trade Chapter 6 in Pugel, T. A. International Economics, 17th Edition Inconsistencies Industrialized countries are similar to each other in many aspects of their relative factor endowments, technologies in the standard and techn...

3. Alternative Theories of Trade Chapter 6 in Pugel, T. A. International Economics, 17th Edition Inconsistencies Industrialized countries are similar to each other in many aspects of their relative factor endowments, technologies in the standard and technological capabilities - Yet, they trade extensively with each other. theories of Much of the trade of an industrialized country is two-way comparative trade in which the country both exports and imports the same or very similar products advantage Need to extend models of trade beyond standard comparative advantage, with its assumption of perfect competition. Incorporate features of rivalry in actual global markets - imperfect competition Scale economies Scale economies - output quantity goes up by a larger proportion than does total cost as output increases Average cost of producing a unit of output decreases as output increases Internal scale economies A larger firm may have a lower average cost If scale economies are modest or moderate, then there is room for a large number of firms Monopolistic competition - a type of market structure in which a large number of firms compete vigorously with each other in producing and selling varieties of the basic product Perfect competition - each of the industry’s many small firms produces an identical commodity-like product, takes the market price as given, and believes that it has no direct control on the market price If scale economies are substantial a few firms will grow to be large in order to reap the scale economies – oligopoly, large firms can control or influence prices External scale economies Based on the size of an entire industry within a specific geographic area Clustering of the production of some products in specific geographic areas: Hollywood and Mumbai Silicon Valley Banking and finance? Stylish clothing? Watches?  Intra-industry trade Inter-industry trade - a country exports some products, imports others, quite different products Intra-industry trade (IIT)—two-way trade in which a country both exports and imports the same or very similar products IIT = (X + M ) – |X – M| Intra-Industry Trade for the United States, Selected Products, 2016  How Important Is Intra-Industry Trade? Average Percentage Shares of Intra-Industry Trade in the Country’s Total Trade in Nonfood Manufactured Products What Explains Intra-Industry Trade? Product category too broad Seasonal comparative advantages Product differentiation Monopolistic competition and trade Intra-industry trade - a model of trade driven by product differentiation and scale economies Mild form of imperfect competition – monopolistic competition: the product offering of each firm is differentiated from the other firms, and yet the variants of different firms are close substitutes for each other there are some internal scale economies in producing a product variant there is easy entry and exit of firms in the long run  The Market with No Trade The U.S. Market for Compact Cars, No Trade  Opening to Free Trade Markets for Compact Cars, No Trade and Free Trade Basis for Trade The basis for exporting is the domestic production of unique models demanded by some consumers in foreign markets The basis for importing is the demand by some domestic consumers for unique models produced by foreign firms Intra-industry trade in differentiated products can be large, even between countries that are similar in their general production capabilities Net Trade and Intra-Industry Trade Gains from Trade Increase in the number of varieties of products Little impact on the domestic distribution of factor income if the (additional) trade is intra-industry Gains from greater variety can offset losses in factor income resulting from interindustry shifts in production Opening to trade favors the survival and expansion of firms with lower cost levels (or higher levels of product quality) Oligopoly and trade An industry in which a few firms account for most of the world’s production is a global oligopoly Implications of substantial scale economies for the pattern of trade Implications of oligopoly pricing for the division of the global gains from trade  External scale economies and trade External Economies Magnify an Expansion in a Competitive Industry In industries that can reap external economies, a rise in demand triggers a great expansion of supply and lowers costs and price Therefore, increasing trade brings gains to all consumers as well as to the exporting producers Among nations having the same initial factor endowments, cost curves, and demand curves, whichever nation moved first to capture its export market would gain a cost advantage in this product