Modern developments; dependency; Krugman; externalities

Question 1

what is dependency theory?

Answer 1

it is the default view for many countries which say poor countries export primary produce to rich countries which then convert them into manufactured goods and sell them back to poorer countries at inflated prices. there are falling terms of trade for primary produce. in order for these primary produce countries they need to get out of the primary product market

Question 2

what is the arguement for falling terms of trade for primary produce?

Answer 2

the primary produce is determined in competitive world markets so they are price takers not price makers which is unlike the manufactured good which come mostly from monopolists or oligopolists which they decide what price. so the primary producers feel dependent
low income elasticity of demand for primary produce as the more your income increases the less percentage you spend on primary goods however you purchase more manufactured goods
the primary products are also vulnerable to substitution for example chile become rich for selling nitrates which are natural goods however now they can be produced artificially in labs.

Question 3

what is an example that shows a comparative advantage in primary products does not condemm you to a slow growth?

Answer 3

australia has 7 out of 10 exports are primary produce
chilean exports have 10 out of 10 exports in primary produce
Australia had a growth rate of 3.44% from 1960 to 2019 and chile averaged at 3.78 between 1997 and 2019
this was greater then USA 3%

Question 4

what has been the most important feature of international trade since the second world war?

Answer 4

the great growth in the absolute and relative importance of multinational corporations (MNCs)

Question 5

what are the causes for the changes in nature of international trade?

Answer 5

recovery from WW2
falling barriers to trade - world trade organisation
worldwide economic development - real incomes have grown
regional economic integration - EU
falling transport and communication costs - larger ships, introduction of mobile
increased international competition
computer-aided design and the internet
outsorcing - using the cheaper labour

Question 6

what are facts about the top 100 MNCs according to Dunning and lundan 2008?

Answer 6

each have on average 216 affiliates across different countries
produce 50% of total foreign production

Question 7

how has the production of traded goods changed after WW2?

Answer 7

production of traded good has become disaggregated and spread across multiple locations worldwide. countries now specialise in different segments of a supply chain rather than the product itself for example manufacturing , branding, assembly or finance
2005 - trade in intermediate inputs accounted for 56% of trade in goods and 73% of services across rich countries

Question 8

what is the impact on MNCS on host countries?

Answer 8

they affect national incomes, trade, BoP , employment and economic development in general
good: they are a source of capital, this allows for technology transfer ( Korea was a big thing with cars) , clusters jump start growth, informal institutions develop ( develop values which encourage business)
bad: exploit resources, corruption (bribe local elites to get deals), pollution havens (adjust production so dirties production is in the poorer countries), transfer pricing ( buying or selling components through supply chains so can declare lowest at high tax source and highest at low tax source)

Question 9

what is the assumptions od krugmans new trade theory with MNCS?

Answer 9

many firms in monopolistic competition (many firms compete each producing their own differentiated products
exogenously given market demand
internal economies of scale

Question 10

what are economies of scale?

Answer 10

as firms increases its scale of operations, the average cost of a unit of output must fall

Question 11

what are diseconomies of scale?

Answer 11

at some point, as scale increases firms will have difficulty organising the firm so costs will begin to increase

Question 12

what does the AC curve look like on the cost and prices against the number of producers look like and why?

Answer 12

the curve will be a postive straight line. this is because as the number of firms grows in monopolist industry - each one trying to sell more output in a given market place- then assuming no change in demand conditions, demand for each firm will be reduced so lower output for each firm so higher the average costs. thus as the number of producers increases, the AC function rises from left to right

Question 13

what does the price of the product curve look like on the cost and prices against number of producers and why?

Answer 13

it is a downward sloping curve which is originally steep then shallows out as the number of producers increases. this is because as the number of firms selling cars increases then assuming total market demand is more or less stable then increasing competition to win sales will cause the average price of cars to fall. so the PP function slopes down left to right

Question 14

what occurs on the costs and price against the number of firms graph when they allow for internal economies of scale?

Answer 14

assume the market is operating at an equilibrium position of P* and N*. if the market demand grows in a country allowing for internal economies of scale for the existing firms then the average cost curve will shift to the right. this will mean that the costs are cheaper then the current price causing new firms to enter the market leading to an extension along the product price curve so now the country has a greater number of firms at N** and a lower price and costs of P**.

Question 15

what are the conclusions for modern developments: dependency ; krugmans new trade theory?

Answer 15

comparative advantage explains inter industry trade eg between primary producer and manufacturing nation, but its economies of scale and monopolistic competition that explains intra industry trade eg why developed countries will import and export cars. where countries possess similar factory proportions for example European countries with high capital labour ratios , then intra industry trade based on economies of scale will dominate however when factor proportions are different then inter industry trade based on comparative advantage is more important
intra industry trade allows a country to rescued the variety of goods it produces increase the scale of production reduce costs and prices and simultaneously increase the range of products available to domestic consumers

Question 16

what occurs on the costs and price and the number of firms when they allow for internal economies of scale and international trade?

Answer 16

suppose there are two countries each with a car industry. home country has 6 and overseas has 10. when trade takes place in a common international market then each firm has access to a larger market with added competition. prices must fall. the more efficient firms can out compete others. each firm may concentrate its production in one country however it will sell products to both markets in order to reap economies of scale. with economies of scale each firm will be able to produce more cars with a lower average cost and price. the combined market will see a reduction in car firms

Question 17

what occurs on the costs and price against the number of firms graph when they allow for internal economies of scale and international trade

Answer 17

orginally the two countries will have seperate average cost and product price curves. when international trade begins, all the firms will enter into intense competition so the price function will decrease from P1 and P2 to the P international. the less efficient firms in both countries will be forced out of business and the remaining firms can increase market share and shift down average costs to the new MNC curve AC international. the new international price is lower then both countries and there will be fewer multinational firms