Intra- Industry trade Flashcards
What is the definition of increasing returns to scale?
We have an initial fixed cost to produce a good or service -> the more we produce, the avarage cost decreases leading to less input costs.
What are the diffrences between external and internal economies of scale?
External:
- Pool of skilled of labour
- Linkages between firms
- Spillover
- Cooperation
Internal:
- MC < AC at all output levels
- Firms must possess some market power
- Spreading fixed costs
- learning- by-doing
What is intra-industry trade?
Two way trade in similar types of goods
What does the internal economes of scale- partial equilibrium show?
It show the increasing returns to scale by showing a graph with MR, D, AC, MC. It shows that the AC will decrease
What the assumptions, productions functions, wages and costs in the internal economies of scale: General equilibrium
Assumptions:
- Free labour mobility
- Y constant returns to scale
- X: increasing returns
- Labour is only factor of production
- L(Y) = Y (one labour unit = 1 output)
Production functions:
- L(Y)=Y
- L(X)= F+ αX
Price:
- p(Y)= 1 (beacause Y is numeraire)
- p(X) = p(X)/p(Y) =P
Wages:
- w(y)= p(y) * MP(LY) = 1
- w(x) = 1
- w(y) = w(x) because of free mobility
TC. MC, AC
- TC(y)= L(y)=Y - TC(x)=wL(x)=F+αX
- MC(y)= 1 - MC(x)=α
- AC(y)= 1 - AC(x)= F/X+MC(x)
What profits will we have for the production of a good with increasing returns to scale?
There will be positive profits when the price is larger than the avarge costs.
What are is the Grubel-Lloyd index?
Index to measue IIT
(Exports-Imports)/(Exports+ Imports)
0= all trade is IIT
1= no trade is IIT
Krugmans model of IIT:
What kind of market do we assume?
Production, Consumers, Goods
Monopolistic competition: Some market power
Differentiated good: Every firm produces a variety
Consumers demand variation of consumption
1. Love for Variety approach
2. Ideal Variety approach
Since there is a conflict between increasing returns to scale anf demand for variety, trade intregration will lead to intra industry trade!
What are the parameters to find Dixit-Stiglitz demand?
Since monopolistic competition, we have a “
- Constant elasticity of substitution” (CES) for the
- utility U as a function of the
- level of consumption (ci) and the
- number of varieties (N),
- ρ represents love of variety effect for conusmers.
- i represents variet index
What values can ρ take and what does that mean?
0 < ρ < 1
< 0 since varieties are imperfect substitues
if ρ = 1 variety does not matter
What is the Dixit-Stiglitz Budget constraint?
I = (N∑i=1) pici Income = The sum of price of variety i * the cosumption of variety i
How does krugmans IIT model look with constant elasticity of demand?
MR, MC
What happens if new firms enter market?
MR= 1-(1/ε) and is lower than the demand curve where they both have the same shape (convex shape)
MC is constant
MR=MR determines q and p at a given mark-up
New firms enter market: then firm i´s demand will fall which reduces output q, though price stays same.
How Will production look in Krugmans model?
assumptions, competition, profits, profit maximation, output
Assumptions:
- firms are identical
- Only L
- internal economies of scale: L(i)= f + mx(i)
where f and m are fixed and require variable labour respectivly
- Each firm produces its own variety i
- Firm monopoly power and can therefore set prices
- Firms take other firms’ prices as given and ignores its own price impact on price index
Profits: π = px-w(f+mx)
Profit Maximation: p(1-(1/ε)) = mw (mark-up pricing) (MR=MC)
What does monopolistic comp imply for competition in short and long run
In short run profits will be made
In long run, more firms will enter market since there is potential for profits, this will lead to consumption spreading over more varieties, quantaties fall and profits go towards zero
What is the formula for determining the number of varieties in a market?
(varieties being firms)
N=L/fε = L/l(i)
fε is the amount of labour used to produce this output x
L is total labour force
