NEW TRADE THEORY Flashcards
What type of trade does old trade theory explain?
North-south trade (trade between richer and poorer countries) which is inter-industry trade (trade of different types of good) and vertical intra-industry trade.
What characteristic is old trade theory centred around?
Differences in productivity or factor endowments explain trade patterns in old trade theory.
Poorer countries (global south) tend to have abundant low skilled labour and natural resources but lack capital.
Richer countries (global north) tend to have more capital, technology and high skilled labour.
What is absolute advantage?
A country has an absolute advantage in producing a good if it can produce it using fewer resources/more efficiently than another country.
It is argued that countries should specialise in producing goods they have an absolute advantage in and trade with others to increase consumption and production.
Give an example of absolute advantage
Japan produces 20 motorcycles per hour and 100 units of rice per hour.
Vietnam produces 5 motorcycles per hour and 150 units of rice per hour.
Japan has an absolute advantage in motorcycles and Vietnam has an absolute advantage in rice.
Japan should export motorcycles and import rice and vice versa.
What type of trade does new trade theory explain?
North-north trade (trade between rich countries who have similar productivity and factor endowments)
This is horizontal intra-industry trade (similar goods but with differentiation)
It also explains the concentration of outsourcing
What two factors determine the scale of an industry in a country?
Starting time - ie first mover advantage, countries who began in the industry at the start have more knowledge and technology than latecomers which cannot be traded
Proximity to big markets - being closer to big markets allows countries to grow the scale of their industry
What is economies of scale?
As firms produce more, the average cost per unit falls and so firms experience increasing returns to scale.
Average cost per unit falls because fixed costs are spread over more units, and technological innovation and cumulative learning reduces costs over time.
How does economies of scale explain north-north trade?
Countries with similar factor endowments can benefit from trade because producing a larger output allows them to lower per-unit costs.
Explain how first-mover advantage explains north-north trade
Countries that enter an industry earlier gain experience and produce at a larger scale
Eg USA dominates the EV industry as firms like tesla have been producing EVs longer and at a larger scale than others
Instead of every country producing every variety of a product, countries specialise in a specific variety and trade
Eg Germany specialise in petrol cars like BMW and Mercedes, and USA specialise in EVs like Tesla
Germany export petrol cars to USA and import EVs from USA and vice versa
What are benefits of north-north trade?
Specialisation in a specific variety of goods lowers global prices as firms in each country reach larger scales and tap into economies of scale
This benefits consumers globally who receive higher quality products at lower prices
Eg German consumers can buy EVs from USA that are cheaper and better quality than if Germany were to produce them
What is concentration of outsourcing?
Firms in the same industry tend to cluster together in certain locations which yields benefits.
Eg financial firms in Canary Wharf, clothing brands in oxford street, movie industry in Hollywood
What are the benefits of firms clustering together?
Lower transportation costs - locating factories near ports or suppliers reduces costs
Knowledge spillovers - cities like London have social hubs like bars and cafes where professionals share ideas
Labour pools - existing industries attract high skilled labour
Pooling of suppliers - Canary Wharf has investment banks, law firms and consultancy firms next to each other
Consumer pooling - shopping centres or high streets cluster stores like clothing stores together to make it convenient for consumers
Shared infrastructure
What are the assumptions of new trade theory?
Internal economies of scale (there is imperfect competition)
Proximity to large markets matter as it helps build scale
Technology improves with cumulative learning (learning by doing), it can’t be simply imported
Products are not homogenous
