L3: International Trade and Market Power

Question 1

internal economies of scale

Answer 1

the level of output increases more than proportionately, compared to the quantity of input

Question 2

3 types of external economies of scale

Answer 2

1. specialised labour market pooling
2. customer/supplier networks
3. technological spillovers

Question 3

Grubel-Lloyd indicator

Answer 3

measures intra-industry trade of a particular product

Question 4

monopolistic competition

Answer 4

model of international trade introduced by Krugman which has a primary feature of competition between many firms that have a monopoly over a very specific variety of things they do

Question 5

intuitions of monopolistic competition

Answer 5

firms benefit from increasing returns
products can be “differentiated” at no cost
each producer has a monopoly over his variety
on supply side, plenty of different firms producing slightly different things in different countries
consumers love variety: they want to consume all varieties

Question 6

pro-competitive effect

Answer 6

if you open up to trade, market gets more perfect and each firm makes less markup which is good for the economy

Question 7

rationalization effect

Answer 7

when you open up to trade and have plenty of varieties, the survivors will be the ‘best’ who are seen as more productive, higher quality, etc. → rationalisation which drives the bad varieties out of business who only survived because of perfect competition

Question 8

optimal level of production that maximizes profits

Answer 8

MR = MC

Question 9

3 steps of opening up to trade in monopolistic competition

Answer 9

1. if two countries of identical size open up to trade, the size of the market doubles and so does the number of firms
2. increase of the number of firms so pro-competitive effect (war on prices)
3. less efficient firms go bankrupt (or M&A)

Question 10

oligopolistic competition

Answer 10

2 way trade even when the good is homogenous (no variety/differentiation) so it is exactly the same good

firms need to take into account that their decisions will affect the market they are active in

Question 11

duopoly

Answer 11

type of oligopoly where two firms have dominant or exclusive control over a market

Question 12

duopoly assumptions

Answer 12

two countries/two firms
produce exactly similar goods = one price on each market - homogenous good
after openness, each firms is going to sell to the foreign market, after paying a transport cost
2 way trade in exactly the same good