Chapter 10 Flashcards
True or False:
New trade theories came as a subtitute for HO theorm
False
They are complementary trade theories, which base a great deal of international trade on economies of scale, imperfect
competition, and differences in the development and spread of new technologies over time among nations
Why is there a call for new trade theories
because of the Diffrences in technological changes over time among nations
What type of trade does the HO theory does not explain
Trade based on Increasing return to scale
One of the assumptions of the H-O model was that both commodities were produced under conditions of constant returns to scale in the two nations
Economies of Scale and International Trade:
How can mutually beneficial trade take place even when the two nations are identical in every respect
With increasing returns to scale mutual beneficial trade can still take place
Definition of Increasing returns to scale:
Refers to the production situation where output grows relatively more than the increase in inputs or factors of production
if all inputs are doubled, output is more than doubled
Economies of Scale and International Trade
Increasing returns to scale may occur because
- At a larger scale of operation a greater specialization becomes possible.
- A larger scale of operation may permit the introduction of more specialized and productive machinery that would not be feasible at a smaller scale of
operation
Give the assumptions of :
Economies of Scale and International Trade
- There are two nations (N1,N2) two commodities (X,Y)
- The two nations are assumed to be identical in every respect
* Tastes are equal in both nations
* Both nations have the same amount of resources
* Both nations use the same technology in production - Increasing returns to scale result in production frontiers that are convex from the origin
Economies of Scale and International Trade
Where is the PPF at the no-trade equilibrium (Autarky equilibrium)?
PPF tangent to highest indifference curve.
Economies of Scale and International Trade
With no trade Equilibrium points are ____ in both nations.
(Autarky equilibrium)
Same
With identical production frontiers and indifference maps, the no-trade equilibrium relative commodity prices in the two nations are
Identical
This is PX/PY = PA in both nations and is given by the slope of the common
tangent to the production frontier and indifference curve I at point A. (point A is the no-trade equlibrium point and PA is the tangent line)
Economies of Scale and International Trade
With trade what happens to the production of the each commodity in Nation 1
Nation 1 specialize completely in the production of commodity X and produce at point B
Point B is a point on the same PPF before trade but it is further down to the right (indicating that nation 1 specializes in the production of commodity X)
Economies of Scale and International Trade
With trade what happens to the production of the each commodity in Nation 2
Nation 2 would then specialize completely in the production of commodity Y and produce at point B′.
The point b’ is on the same indiffrence curve but to the extreme left at the intersection with the Y-axis
Economies of Scale and International Trade
With trade, how each nation would end up
consuming at point E
point E is on indifference curve II
By exchanging 60X for 60Y with each other
Economies of Scale and International Trade
What are the gains from trade when the two nations exchanges 60X to 60Y
gains 20X and 20Y
Economies of Scale and International Trade
In the absence of trade, why the two nations would not specialize in the production of only one commodity
Since each nation wants to consume both commodities. And hence cannot benefit from economies of scale.
Economies of Scale and International Trade
The matter of complete indifference which of the two nations specializes in production of commodity X or commodity Y may result from
Historical acident
it doesn’t matter which nation specializes in the production of a specific commodity, whether it is commodity X or commodity Y
According to Economies of Scale and international Trade:
The two nations need not be identical in every respect for
Mutually beneficial trade to result from increasing returns to scale
What happens if economies of scale persist over a long range of outputs in a given market?
If economies of scale persist over a sufficiently long range of outputs, one or a few firms in the nation will capture the entire market for a given product, leading to monopoly or oligopoly.
What happens if economies of scale persist over a long range of outputs in a given market?
If economies of scale persist over a sufficiently long range of outputs, one or a few firms in the nation will capture the entire market for a given product, leading to monopoly or oligopoly.
Why economies of scale or increasing returns to scale must also be clearly distinguished from external economies.
Economies of scale are internal to the firm and result in cost reductions as the firm’s output increases. External economies, on the other hand, refer to the reduction in each firm’s average cost of production curve as the entire industry output expands, due to factors external to the firm.
What are the factors that contribute to intra-industry trade?
Intra-industry trade is facilitated by the presence of differentiated goods and economies of scale. Differentiated goods allow for specialization and the production of unique products, while economies of scale enable firms to achieve cost advantages and compete in international markets with their differentiated products.
How does the presence of product differentiation impact international trade?
Product differentiation leads to a type of trade known as intra-industry trade. Intra-industry trade refers to the exchange of differentiated products between countries, where both imports and exports of similar goods occur. This type of trade is not accounted for in classical and neoclassical trade theories, which assume homogeneous goods.
What is the characteristic of the output in modern economies today?
A large portion of the output in modern economies involves differentiated products rather than homogeneous products.
What does intra-industry trade refer to?
Intra-industry trade refers to the exchange of differentiated products within the same industry or broad product group. It involves the trade of similar goods rather than completely different products.
What is the difference between intra-industry trade and inter-industry trade?
Intra-industry trade involves the exchange of differentiated products within the same industry, while inter-industry trade refers to the trade of completely different products between different industries.
Is intra-industry trade more common than inter-industry trade in modern economies?
Yes, a significant portion of international trade involves intra-industry trade in differentiated products. This means that countries are trading similar goods within the same industry rather than trading completely different products.
What is the difference between trade based on product differentiation and inter-industry trade?
Trade based on product differentiation involves the exchange of differentiated products within the same industry, while inter-industry trade involves the trade of completely different products between different industries.
What are the two assumptions that are dropped in trade based on product differentiation?
The two assumptions that are dropped in trade based on product differentiation are perfect competition and constant economies of scale.
How does trade based on product differentiation differ from the predictions of the H-O model?
Trade based on product differentiation deviates from the predictions of the H-O (Heckscher-Ohlin) model, which assumes inter-industry trade involving completely different products. In trade based on product differentiation, industries with differentiated products have their own characteristics and trade patterns.
What is the role of unit costs in intra-industry trade?
Keeping unit costs low is crucial in intra-industry trade.
How does international competition affect the production of varieties and styles?
International competition forces each firm or plant in industrial countries to produce only one, or at most a few, varieties and styles of the same product instead of many different varieties and styles
How does specialization in production contribute to lower costs?
With few varieties and styles, more specialized and faster machinery can be developed, allowing for continuous operation and longer production runs, which helps lower costs.
What is the role of imports in intra-industry trade?
Intra-industry trade involves nations importing varieties and styles of the product that they do not produce domestically.
What are the benefits of intra-industry trade for consumers?
Intra-industry trade benefits consumers by providing a wider range of choices and a greater variety of differentiated products at lower prices.
What are the factors that explain intra-industry trade?
Intra-industry trade is explained based on economies of scale in production and the presence of differentiated products.
How does the size and factor proportions of economies influence trade based on comparative advantage?
Trade based on comparative advantage is likely to be larger when there are greater differences in factor endowments among nations.
In what context is intra-industry trade likely to be larger?
Intra-industry trade is likely to be larger among industrial economies of similar size and factor proportions (when factors of production are broadly defined).
According to the theory of intra-industry trade, how does the production of differentiated products under economies of scale affect the accuracy of pre-trade relative commodity prices in predicting the pattern of trade?
With differentiated products produced under economies of scale, pre-trade relative commodity prices may no longer accurately predict the pattern of trade.
Why may a smaller country be able to undersell a larger country in the same commodity, despite the larger country having lower production costs in the absence of trade?
With trade and the ability to take advantage of economies of scale, all countries can benefit to the same extent, allowing the smaller country to potentially undersell the larger nation in the same commodity.
What gives rise to intra-industry trade?
Economies of scale in differentiated products
what determines the pattern of inter-industry trade?
Comparative advantage
In which scenario is inter-industry trade more important?
When there are more dissimilar factor endowments, such as between developed and developing countries.
In which scenario is intra-industry trade likely to be dominant?
When there are more similar factor endowments broadly defined, such as among developed countries.
According to Lancaster (1980), what role does comparative advantage play in intra-industry trade?
Comparative advantage is somewhere in the background, even in the case of intra-industry trade.
How does inter-industry trade differ from intra-industry trade in terms of comparative advantage?
Inter-industry trade reflects natural comparative advantage, while intra-industry trade reflects acquired comparative advantage.
What is the basis for trade in the H-O model (inter-industry trade)?
Trade in the H-O model is based on comparative advantage or differences in factor endowments among nations.
Is intra-industry trade larger among countries with similar or dissimilar factor endowments?
Intra-industry trade is larger among countries with similar factor endowments (as among developed countries).
Is inter-industry trade larger among countries with similar or dissimilar factor endowments?
Inter-industry trade is larger among countries with dissimilar factor endowments (as between developed and developing countries).
According to the H-O model, does trade lower the return of a nation’s scarce factor?
Yes, according to the H-O model, trade is predicted to lower the return of a nation’s scarce factor.
Oppositely with intra-industry trade, it is possible for all factors to gain
What is the relationship between intra-industry trade and outsourcing/offshoring?
Intra-industry trade is related to the increase in international trade in parts and components through outsourcing and offshoring.
What is outsourcing?
Outsourcing refers to the purchase by a firm of parts and components abroad to reduce costs
What is offshoring?
Offshoring refers to a firm producing some of the parts and components used in its products in its own plants abroad.
How is the level of intra-industry trade measured?
The level of intra-industry trade can be measured using the intra-industry trade index (T).
What do X and M represent in the calculation of the intra-industry trade index?
X represents the value of exports of a particular industry or commodity group, while M represents the value of imports.
What is the range of values for the intra-industry trade index?
The value of the intra-industry trade index (T) ranges from 0 to 1.
What does a value of T = 0 indicate?
A value of T = 0 indicates that a country only exports or only imports the good in question, meaning there is no intra-industry trade.
What does a value of T = 1 indicate?
A value of T = 1 indicates that the exports and imports of a good are equal, representing maximum intra-industry trade.
How is the level of intra-industry trade determined based on the value of T?
The higher the value of T, the higher the level of intra-industry trade.
What is a serious shortcoming of using the index T to measure the degree of intra-industry trade?
The index T can yield different values depending on how broadly the industry or product group is defined.
How does the definition of an industry affect the value of T?
The more broadly an industry is defined, the higher the value of T will be.
Why does broadening the industry definition lead to a higher value of T?
Broadening the industry definition increases the likelihood of a country exporting some varieties of the differentiated product and importing others
How should the T index be used?
The T index should be used with caution. It can be useful for measuring differences in intra-industry trade across industries and changes in intra-industry trade over time within the same industry.
What is the market organization called when there are many firms selling a differentiated product and entry into or exit from the industry is easy?
Monopolistic competition.
What does the demand curve (D) represent for a firm in a monopolistic competition market?
The demand curve represents the demand faced by the firm for the differentiated products it sells.
How would you describe the elasticity of demand in a monopolistic competition market?
The demand curve faced by the firm is fairly elastic, meaning that a small price change leads to a large change in the firm’s sales.
What is the relationship between the firm’s average cost curve (AC) and its output in a monopolistic competition market?
The firm’s average cost curve (AC) is downward sloping, meaning that it declines as output increases.
How does the firm’s marginal cost curve (MC) compare to the average cost curve (AC) in a monopolistic competition market?
The firm’s marginal cost curve (MC) is below the average cost curve (AC).
Why is the firm’s marginal cost curve (MC) below the average cost curve (AC) in a monopolistic competition market?
The marginal cost curve (MC) must be smaller than the average cost curve (AC) for the average cost to decline as output increases.
At what point does the firm achieve its best level of output in the monopolistic competition market?
The firm achieves its best level of output at point E, where the marginal revenue (MR) and marginal cost (MC) curves intersect.
What happens if the firm produces at a level of output smaller than 3 units?
At a smaller level of output, the firm’s marginal revenue (MR) exceeds marginal cost (MC), indicating that it is beneficial for the firm to expand output
What happens if the firm produces at a level of output greater than 3 units?
At an output greater than 3 units, the firm’s marginal revenue (MR) is less than marginal cost (MC), indicating that it is beneficial for the firm to reduce output.
What is the optimal level of output for the firm in the monopolistic competition market?
The optimal level of output for the firm is 3 units.
What is the relationship between the demand curve (D) and the average cost curve (AC) for the firm in the long run?
In the long run, the demand curve facing the firm (D) is tangent to its average cost curve (AC), resulting in a price (P) equal to the average cost ($4) at the optimal output level (Q = 3).
How does the firm perform in terms of profits in the long run?
The firm breaks even in the long run, earning only a normal return on investment.
How does the similarity of factor endowments and technology among nations affect the importance of inter-industry trade?
The more similar nations are in factor endowments and technology, the smaller is the importance of inter-industry trade.
How does intra-industry trade affect the predictability of trade patterns based on pretrade-relative commodity prices?
With intra-industry trade, pretrade-relative commodity prices may no longer accurately predict the pattern of trade.
What is intra-industry trade related to in terms of international trade?
Intra-industry trade is related to the sharp increase in international trade in parts and components of a product.
What types of countries are more likely to engage in intra-industry trade?
Intra-industry trade arises more between nations with similar tastes and income levels.
Which type of trade dominates between developed and developing countries?
While most of the trade between developed and developing countries is inter-industry trade.
What is the trend of intra-industry trade among industrial countries?
An increasing proportion of the trade among industrial countries is intra-industry trade.
What role does technology play in trade based on dynamic technological differences?
Dynamic changes in technology among nations can influence patterns of international trade.
What does the Imitation Lag Hypothesis in the context of international trade?
The Imitation Lag Hypothesis suggests that the introduction of a new product from one country to another is delayed due to two types of lags: imitation lag and demand lag.
How does the labor skill requirement change throughout the product cycle?
Initially, when a new product is introduced, it typically requires highly skilled labor for production. However, as the product matures and becomes standardized, it can be produced using mass production techniques and less skilled labor.
What happens to the comparative advantage in the product according to the Product Cycle Model?
In the Product Cycle Model, the comparative advantage in the product shifts from the advanced nation that originally introduced it to less advanced nations with relatively cheaper labor. This transition occurs as the product becomes standardized and suitable for mass production.
What is the relationship between foreign direct investments and the Product Cycle Model?
The Product Cycle Model suggests that foreign direct investments may accompany the shift in production to nations with cheaper labor. The innovating nation may invest in production facilities in these nations to take advantage of the lower labor costs.
What is the main prediction of the Product Cycle Model regarding trade patterns?
The Product Cycle Model predicts that highly industrialized economies will export non-standardized products embodying new and advanced technologies, while importing products embodying older or less advanced technologies.
How does the Product Cycle Model relate to changes in relative factor abundance among nations?
According to the Product Cycle Model, trade patterns are influenced by changes in relative factor abundance, including changes in technology, among nations over time.
Is the Product Cycle Model considered an alternative to the Heckscher-Ohlin (H-O) model?
No, the Product Cycle Model is not considered an alternative to the H-O model. Instead, it can be seen as an extension of the H-O model into a technologically dynamic world, incorporating changes in technology and relative factor abundance.
How do less developed nations gain a comparative advantage in the Product Cycle Model?
In the Product Cycle Model, less developed nations gain a comparative advantage through imitation and product standardization, which allows them to utilize their relatively cheaper labor and compete in the production of standardized goods.
What is the main difference between the product cycle model and the basic Heckscher-Ohlin (H-O) model in terms of comparative advantage?
The product cycle model focuses on dynamic comparative advantage for new products and production processes, whereas the basic Heckscher-Ohlin (H-O) model explains static comparative advantage.
What is the first stage of the product cycle model?
The first stage of the product cycle model is the new-product phase, where the product is produced and consumed only in the innovating country.
What is the second stage of the product cycle model?
The second stage of the product cycle model is the product-growth phase. During this stage, production is perfected in the innovating country and experiences rapid growth to meet increasing demand domestically and internationally. At this stage, there is no foreign production of the product, giving the innovating country a monopoly in both the domestic and export markets.
What happens in the third stage of the product cycle model?
The third stage of the product cycle model is the product-maturity phase. During this stage, the product becomes standardized, and the innovating firm may choose to license other domestic and foreign firms to produce the product. As a result, the imitating country starts manufacturing the product for its domestic consumption. This marks the beginning of production by imitating firms in other countries.
What happens in the fourth stage of the product cycle model?
The fourth stage of the product cycle model is characterized by the imitating country underselling the innovating country in third markets. As the product becomes standardized and no longer requires specialized development and engineering skills, the imitating country benefits from lower labor and production costs. This allows them to offer the product at a lower price, leading to a decline in production of the product in the innovating country. During this stage, competition shifts from brand competition to price competition.
What happens in the fifth stage of the product cycle model?
In the fifth stage of the product cycle model, the imitating country begins to undersell the innovating country even in the innovating country’s own market. As a result, production of the product in the innovating country experiences a rapid decline or even collapse. This stage is often referred to as the product-decline stage.
What are stages IV and V of the product cycle model often referred to as?
Stages IV and V of the product cycle model are often referred to as the product-decline stage.
According to the product cycle model, what happens to the innovating country as the product reaches the end of its life cycle?
As the product reaches the end of its life cycle, the innovating country shifts its attention to new technological innovations and the introduction of new products.
