1 / 6

International Economics

International Economics. Lecture 6 | Carlos Cuerpo | Scale, Competition and Trade. S cale, competition and trade: Motivation. The observed importance of intra-industry trade: Traditional Trade Theory is no longer able to explain these patterns

easter
Download Presentation

International Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International Economics Lecture6 | Carlos Cuerpo | Scale, Competition and Trade

  2. Scale, competition and trade:Motivation • The observed importance of intra-industry trade: • Traditional Trade Theory is no longer able to explain these patterns Exports and Imports within sectors exhibit a tendency towards equalization rather than national specialization Grubel-Lloyd index indicates the relative importance of inter (tends to 0) vs. intra-industry (tends to 1) trade • A new Trade Theory was needed to explain why similiar countries (in terms of technology, endowments,…) gain from trading with each other and why a significant part of that trade is made within the same industries. Intra-IndustryTrade: Balassa (1966) showedthatthetrade share of thedominantsuppliers in anindustryduringtheimplementation of the EEC decreased in practicallyallindustries

  3. Scale, competition and trade:basic assumptions • Economies of Scale: Figure 1. Unit Cost of Production IncreasingReturnstoScale: Output growsproportionately more thantheincrease in inputs. Source: WTO World Trade Report 2008

  4. Scale, competition and trade:basic assumptions • Economies of Scale: • Common inreal-life situations: Existence of fixed costs, that get distributed over a larger number of units, as the output level increases. • IRS result in Production Frontiers that are CONVEX IncreasingReturnstoScale: Output growsproportionately more thantheincrease in inputs. Y B’ • Pre-Trade Equilibrium: A. With identical technology, endowment and preferences. • Trade allows complete specialization [B, B’] • If we allow a 1 to 1 exchange ratio, we reach a higher indifference curve. • Pattern of Trade is not determined: Historical accidents P II A I B X

  5. Scale, competition and trade:basic assumptions • Product Differentiation: • We do not observe complete specialization because consumers prefer to choose from differen variaties: 'love of variety' This leads to Intra-Industry Trade, which arises to take advantage of economies of scale in production. • Intra-industry trade benefits consumers because of the wider range of choices available, and the lower prices due to Ec of Scale. • Both types of trade (inter and intra-industry) occur today and are backed by different theories. DifferentiatedProducts: Thesomewhatdifferentproductsproducedbydifferentmanufacturers in thesameindustry International competition forces each firm in industrial countries to produce just a few varieties and styles of the same product in order to keep unit costs low.

  6. Scale, competition and trade:Assignment • Evaluate the relative importance of economies of scale and comparative advantage incausing the following: • Most semiconductors are manufactured in either the US or Japan. • Most of the world's aluminium is smelted in Norway or Canada. • Much of the world's best wine comes from France. • Half of the world's large jet aircraft is assembles in Seattle. • Most Scotch whiskey comes from Scotland

More Related