Other Trade Models

Question 1

What are the ‘other’ trade models?

Answer 1

• Internal economies of scale & Imperfect competition &
Product differentiation: Intra-industry trade
• Taste difference (demand
• Linder’s hypothesis side)
• Product cycle model

Question 2

What is inter-industry trade?

Answer 2

• 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

Question 3

What is intra-industry trade?

Answer 3

• 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)

Question 4

How is intra-industry trade measured?

Answer 4

Grubel-Lloyd index

Question 5

Explain Grubel-Lloyd equation and values

Answer 5

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

Question 6

What patterns of intra-industry trade exist?

Answer 6

Trade between developed countries accounts most
of the world trade.
• Intra-industry trade is very large between high- income countries

Question 7

What can’t be used to explain intra-industry trade?

Answer 7

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

Question 8

How can intra-industry trade be explained?

Answer 8

• (Internal) Economies of scale (increasing returns to scale)
• imperfect competition
• product differentiation- across countries e.g. for in us, Toyota in China

Question 9

Explain how economies of scale explain intra trade?

Answer 9

• (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

Question 10

Explain economies of scale in terms of imperfect competition

Answer 10

• 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.

Question 11

What is the competition usually when there are economies of scale?

Answer 11

• 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.

Question 12

What is the intra-trade impact of the number of products produced?

Answer 12

• 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

Question 13

Explain why intra-trade occurs in terms of product differentiation?

Answer 13

• 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

Question 14

What is taste differneces as a basis for trade?

Answer 14

If tastes differ between countries, a basis for trade will exist even if technology and factor endowment are identical

Question 15

Explain how taste differences impact the shape of ICs and the PPF?

Answer 15

• 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

Question 16

Explain taste differences as a basis for trade

Answer 16

• 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.

Question 17

Explain taste differences as a basis for trade in terms of the diagram

Answer 17

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.

Question 18

How can the trade equilibrium be found for taste differences as a basis for trade?

Answer 18

• 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.

Question 19

What type of factors does taste differences look at?

Answer 19

• 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

Question 20

What did Linder observe?

Answer 20

• Linder (1961) observed that a large volume of trade existed between the developed countries
• And still true today

Question 21

What is Linder’s Hypothesis?

Answer 21

• 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.

Question 22

In terms of Linder’s hypothesis, what doe she state about a new manufactured good?

Answer 22

• 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.

Question 23

what country/ies are chosen to export to in Linder’s hypothesis?

Answer 23

•the country with similar demand
pattern!
• In reality, income per capita is usually used as a
proxy to describe the demand pattern

Question 24

what is Linders hypothesis also known as and why?

Answer 24

• 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

Question 25

Explain the product cycle model

Answer 25

• 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

Question 26

Explain the product cycle model idea of competition?

Answer 26

• Brand competition gives way to cost competition when it can be produced by smaller countries

Question 27

Explain the CA argument of the product life cycle model

Answer 27

• 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

Question 28

What is stage 1 of the product life cycle?

Answer 28

New-product phase, the product is produced and consumed only in the innovating country

Question 29

What is stage 2 of the product life cycle?

Answer 29

• 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.

Question 30

What is stage 3 of the product life cycle?

Answer 30

• 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

Question 31

What is stage 4of the product life cycle?

Answer 31

• 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.

Question 32

What is stage 5 of the product life cycle?

Answer 32

• the production in the innovating country declines rapidly (bc imitating has cheaper labour)
• starts importing the products from the imitating country

Question 33

Why is the product life cycle model not as attractive these days?

Answer 33

• 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