Other Trade Models Flashcards
What are the ‘other’ trade models?
• Internal economies of scale & Imperfect competition &
Product differentiation: Intra-industry trade
• Taste difference (demand
• Linder’s hypothesis side)
• Product cycle model
What is inter-industry trade?
• Inter-industry trade: trade between industries. (1 way within a single industry)
-Simultaneous exports and imports of products belonging to different industries.
- E.g. US exports computers to China and China exports
shoes to US
What is intra-industry trade?
• Intra-industry trade: trade within an industry (2 way trade)
- Simultaneous exports and imports of products belonging to the same industries.
- E.g. US exports Ford to Japan and Japan exports Toyota to US. (car industry)
How is intra-industry trade measured?
Grubel-Lloyd index
Explain Grubel-Lloyd equation and values
GLi=1- (exports i-imports i)/(exports i + imports i )
or 1- (net trade)/(total trade value)
• The value is between 0 and 1. The larger it is, the larger is intra-industry trade.
• What if Exports=0 or Imports=0? GL=0 e.g. only imports cars and doesn’t export
• What if Exports=Imports? GL=1
What patterns of intra-industry trade exist?
Trade between developed countries accounts most
of the world trade.
• Intra-industry trade is very large between high- income countries
What can’t be used to explain intra-industry trade?
Ricardian technology and HO model useful for inter-industry but not intra-industry because:
Within an industry, technology is similar across these
countries so Ricardian not useful
Within an industry, factor intensity of products and factor endowments are similar across these countries so HO not useful
How can intra-industry trade be explained?
- (Internal) Economies of scale (increasing returns to scale)
- imperfect competition
- product differentiation- across countries e.g. for in us, Toyota in China
Explain how economies of scale explain intra trade?
- (Internal) economies of scale means that AC of a firm becomes lower when firm’s output grows
- Increasing returns to scale.
- Production on a larger scale lowers per unit cost and provides a source of cost advantage driving export-as serving world market means more production
Explain economies of scale in terms of imperfect competition
• Products produced by different manufacturers in the
same industry are usually differentiated.
-e.g. Toyota and Ford automobiles are differentiated
products
• With differentiated products, firm can exploit the
economies of scale.
• so, economies of scale is usually studied with
imperfect competition and product differentiation.
What is the competition usually when there are economies of scale?
• With economies of scale, the production of an industry is usually in hand of serval producers (imperfect competition). e.g. monopoly, oligopoly, monopolistic competition, etc.
What is the intra-trade impact of the number of products produced?
• Rather than producing a few units of each good,
• a country can produce large quantities of a small
number of goods ( industries with economies of scale) and trade for the remaining goods.
e.g. US can produce only energy-intensive cars and import small energy saving cars
Explain why intra-trade occurs in terms of product differentiation?
• Trade can happen because consumers love for
variety.
• Each country manages a few differentiated products and exports its own products.
• Both countries are better off due to more varieties
What is taste differneces as a basis for trade?
If tastes differ between countries, a basis for trade will exist even if technology and factor endowment are identical
Explain how taste differences impact the shape of ICs and the PPF?
• HO - IC identical & PPF different
-autarky-relative prices are different between
countries
• Tastes differ-IC will be different &PPF identical (as
supply differences ignored) between
countries
-autarky relative prices differ as well
Explain taste differences as a basis for trade
• Consumers of country H have tastes biased towards consumption of Y,
-consumers of country F have tastes biased towards
consumption of X.
• This taste difference gives country H a comparative advantage in X,
-and country F a comparative advantage in Y.
Explain taste differences as a basis for trade in terms of the diagram
In autarky, country H has lower value of |slope| than country F
• Like Ricardian and HO models, |slope| means the OC of X and relative price of X.
• so country H has lower OC of X and relative price of X than country F.
• Country H has CA in X and so exports X.
• Country F has CA in Y and so exports Y.
How can the trade equilibrium be found for taste differences as a basis for trade?
• How to solve trade equilibrium is the same as
HO model.
• World price line as the new budget line
• New tangent point as the equilibrium
• How to identify the exports and imports, i.e. trade triangles, is the same with HO.
What type of factors does taste differences look at?
- It shows demand-side factors can be the cause of trade;
* Note that Ricardian and HO models look at the supply-side factors, i.e. technology and resources
What did Linder observe?
- Linder (1961) observed that a large volume of trade existed between the developed countries
- And still true today
What is Linder’s Hypothesis?
• Developed countries have similar technology and
factor endowments (Ricardian and HO not useful
here).
• Instead, Linder contended that the perceived demand is important for trade.
In terms of Linder’s hypothesis, what doe she state about a new manufactured good?
• A new manufactured good is introduced only when an entrepreneur believes there is sufficient potential demand. (perception of demand)
• the entrepreneur is most familiar with the domestic market.
• Thus, there should be sufficient demand in the domestic market for the good to be produced
and sold.
what country/ies are chosen to export to in Linder’s hypothesis?
•the country with similar demand
pattern!
• In reality, income per capita is usually used as a
proxy to describe the demand pattern
what is Linders hypothesis also known as and why?
- also referred to as overlapping demand hypothesis or the preference similarity hypothesis
- because trade occurs between developed countries with similar preferences e.g. expensive sophisticated products but low income may want cheaper goods
Explain the product cycle model
• new product usually requires highly skilled labour to produce.
• As the product matures and acquires mass
acceptance, it becomes standardized.
• Then it can be produced by less skilled labor.
• The production of the product shifts from the
original country, e.g. the developed country, to
developing country
Explain the product cycle model idea of competition?
• Brand competition gives way to cost competition when it can be produced by smaller countries
Explain the CA argument of the product life cycle model
- Involves the argument of dynamic comparative advantage
- e.g. US dominates radio components at first (end of WW2) and then over time Japan manages to produce more cheapy (cheaper labour) so gains CA
What is stage 1 of the product life cycle?
New-product phase, the product is produced and consumed only in the innovating country
What is stage 2 of the product life cycle?
- product-growth phase, production is perfected in the innovating country and increases rapidly
- to accommodate the rising demand in home country.
- At this stage, there is no foreign production of the product, so that innovating country exports the product.
What is stage 3 of the product life cycle?
- product-maturity phase,
- the product becomes standardized and the imitating country starts producing the product for the domestic market.
- In this stage, the innovating country still exports the product
What is stage 4of the product life cycle?
- The imitating country begins to undersell the innovating country.
- The exports of innovating country is decreased while the imitating country starts to export the product.
What is stage 5 of the product life cycle?
- the production in the innovating country declines rapidly (bc imitating has cheaper labour)
- starts importing the products from the imitating country
Why is the product life cycle model not as attractive these days?
- the global value chain makes this model not attractive because components of different final products are from all over the world
- So hard to tell whether a product is imported or exported
