6.7. Trade vs No Trade Flashcards
Gains from trade
A drop in price:
- Surviving firms produce more quantity.
- Cost of production is down, due to increasing returns to scale.
- The selling price is driven down, from.
An increase in variety:
- There are fewer product varieties made within each country (by fewer firms).
- But, consumers have more product variety because they can choose products from both countries after trade.
Losses from trade
Adjustment costs.
Some firms shut down or exit the industry at times when AC > P.
Leading to unemployment of redundant workers.
In the long-run, we expect workers to find new jobs, so adjustment costs are only temporary.
If workers remain unemployed for a significant amount of time, they may lose skills and struggle to relearn them.
Intra-industry trade equation
Index of intra-industry trade = minimum of imports and exports / 0.5*(imports+exports).
What does the index show?
Reveals which proportion of trade involves imports and exports.
If the index is 100%, this means that an equal amount of the good is imported and exported.
If the index is 0%, this means that a good is imported or exported, but not both.
Horizontal intra-industry trade
Imports and exports occur of similar to differentiated goods, within the same industry.
Involves goods that are similar in quality and at a comparable level of processing.
For example, the trade of different brand cars or phones.
The source is product differentiation.
Vertical intra-industry trade
Imports and exports occur within the same industry, but products are at a different stage in their production or have different levels of quality.
Goods may differ in quality, price or production stage.
For example, a country may export luxury cars but import basic cars.
The source is fragmentation (similar to vertical disintegration).
Inter-industry trade
Imports and exports of goods are in many different sectors.
The source of this is comparative advantage.
Gravity equation
Trade between two countries is proportional to their size, measured in GDP, and inversely proportional to the geographic distance between them.
Therefore, countries with larger GDPs, or that are close together, have more trade.
Trade = B (constant) * (GDP1 * GDP2)/distance.
Gravity and its implications
An implication of the monopolistic competition model.
Large countries import more than small countries, since their demand is higher, and export more, since they offer more product varieties.
In the model, demand for country 1’s product varieties is given by its share of world GDP.
Share2 = GDP2/GDPworld.
Export to country 2 is then given as:
Trade = 1/GDPworld * (GDP1*GDP2)/distance.
Border effects
There is approximately 14 times more trade within Canada than between Canada and the US.
This is caused by border effects (the extent to which internal trade exceeds international trade).
The border effect is caused by:
- Tarrifs.
- Quotas.
- Red tape (time through customs).
- Geographical factors.
- Cultural factors.
