Innovation on trade Flashcards
Why do companies innovate?
To survive
To compete
For economic growth, productivity/efficiency gains and maximise productive potential of the country.
What does Paul Romer claim innovation is?
Never making new stuff, just rearranging how use the inputs to produce better output.
What does the neoclassical model suggest drives output? Using the formula as evidence.
Productivty as a function of capital and labour. Y = A(KL).
What does Romers new growth theory suggest determines output?
Y = K^a (ALy))^1-a
a= output elasticity of capital (between 0-1 = decreasing returns to scale in capital stock as depreciates)
Ly = output producing, labour used to produce ideas or output.
A = knowledge - makes it increasing returns overall
What does Romers growth theory conclude?
Growth is based on ideas, privately produced by firms or by spillover e.g Japan reverse engineered US machines to improve their steretypes. = increasing returns.
Ideas can’t be sold as they are non rivalrous so have a MC = 0.
List the different views of trade theory on innovation?
Absolute advantage
Comparative advantage
Leontieff paradox
Heckscher-
PLC theory
Intra-industry trade
What is absolute advantage and why is this pessimistic for developing/backward countries?
Country that can produce product at the lowest cost will produce it and export it.
Developing countries balance of trade will always be negative as will be net importers
What is the comparattive advantage model?
Country that can produce product at lowest opportunity cost will produce and export it. Maximises total level of production as Country A produce most efficient amount of X and buy their desired amount of Y from producer B
Provide a numerical example of comparative advantage between two countries.
How does Hechschers model relate to CA?
nation specialises in production based on the factor (capital/labour) that they use intensively.
How does innovation feed into the AA and CA theory?
Product innovation doesnt fit in scope as assumed to be fixed.
Process innovation reduces the cost of production and promotes efficiency gains so can change the balance of CA if one country adopts a process innovation that another doesnt.
Innovation in transport reduces the cost to trade goods so makes trade between more countries viable.
What is the Leontieff paradox?
Doesnt comply to the expectation that capital intensive country should export capital intensive products. In fact it illustrates that some countries that are tech advanced that they export products that are labour intensive such as the USA.
How does the PLC theory relate to CA?
Shows how CA can change throught the process of a products life. CA changes based on where a product is in its life.
Comment on the level of growth, competition and type of customer at each stage in the product life cycle?
Introduction - slow growth due to customer inertia, pioneering customers are small (early adopters), price of product high and buyers might delay purchase until identify industry standard. Low level of competition.
Growth - rapid growth as inertia overcome, clearer idea of industry standard and product falls in price. High competition. (mainstream customers)
Maturity stage - growth in sales start to level off and is reliant on repeat purchases and replacements. Competition declines. (Late adopters)
Decline - sales decline as new tech emerges, . Customers are mainly sophisticated buyers that are reliant on reliability and price conscious. (laggards)
Where do tech advanced countries perform best?
In early stages as allows them to sell to countries where tech ad is paramount. This explains the Leontieff paradox as products in early stage are often labour intensive.
