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.