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Lecture plan

GRA 6649 International Economics Lecture 8 Associate professor Per Botolf Maurseth Per.B.Maurseth@bi.no. Lecture plan. Outline. Taking stock Trade between rich countries Intra industry trade Increasing returns and monopolistic competition. Outline – rest of the course.

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Lecture plan

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  1. GRA 6649International Economics Lecture 8Associate professor Per Botolf MaursethPer.B.Maurseth@bi.no

  2. Lecture plan

  3. Outline • Taking stock • Trade betweenrichcountries • Intraindustry trade • Increasingreturns and monopolisticcompetition

  4. Outline – rest of the course • Lecture 8: Increasing returns and monopolistic competition • Lecture 9: Increasing returns and monopolistic competition - continued • Lecture 10: Economic Geography • Lecture 11: Economic Geography • Lecture 12: The gravity equation • Lecture 13: Open

  5. Why is there so much trade between US and other rich countries? • Factor content is similar? HOS cannot predict this trade. • Much trade is intra-industry, i.e. trade within commodity groups. • Standard measure of IIT: The Grubel-Lloyd index • Gi = 2 min (EXPi, IMPi)/ (EXPi+ IMPi) • or • Gi = 1 – |(EXPi- IMPi)|/ (EXPi+ IMPi) • for sector i. • A related measure is the net export ratio • Bi = (EXPi- IMPi)/ (EXPi+ IMPi) • since Gi = 1 - |Bi|

  6. G = 1 – i |(EXPi- IMPi)|/i (EXPi+ IMPi) • The index can be applied to a country’s trade with all partners, or bilaterally. It will normally lower in the latter case. For example, assume that Norway exports good X to Germany and imports it from France. If IIT is calculated for Norway’s total trade in X (with all partners), trade with Germany and France would, taken together, represent intra-industry trade, whereas in bilateral IIT measures it would not.

  7. Some stylised facts on IIT: • It varies across sectors, and is higher for skill-intensive sectors. It is not positively correlated with measures of economies of scale in production (some results show a negative correlation). • It is higher in the trade of rich countries, and between rich countries. • It is higher between countries at similar income levels. • It falls with the distance between countries. • For many EU countries, more than 60% of trade is IIT. • Norway has low IIT, around 1/3 (based on 8-digit HS). • Oligopoly/concentration: Mixed results as to whether IIT is higher in sectors with high concentration.

  8. Trade is intra-industry:

  9. Trade is intra-industry:

  10. Increasing returns and monopolistic competition • Increasing returns: cannot have perfect competition • Monopolistic competition • Many varieties within a commodity group • Consumers have preferences for more commodities (an approximation – could be many different consumers as well). • Increasing returns: AC>MC • Free entry ensures zero profits

  11. Monopolistic competition • Must put emphasis on consumers. • This lecture: Dixit-Stiglitz preferences. • Autarky market • Next time: • Trade • Trade with transportation costs – home market effect

  12. Literature: • Lecture notes by Karen Helene Ulltveit-Moe. • Lecture notes • Krugman (1994) ch. 1 and 2 • Feenstra (2004) ch. 5

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