Intraindustry_Trade__Lesson_28_

Intraindustry_Trade__Lesson_28_ - Increasing Returns to...

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1 Lesson 28 1 Increasing Returns to Scale and Trade All models based on comparative advantage predict that trade between very different countries is more beneficial than trade between similar countries A disproportionate share of world trade occurs among very similar countries (e.g., the U.S. and Canada, countries within Western Europe, etc. Lesson 28 2 All models based on comparative advantage predict that all trade is interindustry trade i.e., a country imports one kind of good and exports something completely different There exists a sizeable amount of intraindustry trade (simultaneously importing and exporting goods within the same industrial classification) Lesson 28 3 Grubel-Lloyd index of intraindustry trade for industry i is 1 ii i EX IM GL EX IM =− +
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2 Lesson 28 4 Example: suppose the country exports $4 million of bread, but does not import any bread 0 B IM = 1 B B B B B EX IM GL EX IM =− + 4 B EX = There is zero intraindustry trade in bread 40 1 + 4 1 4 0 = Lesson 28 5 Example: suppose the country exports $100 billion of cars and imports $200 billion of cars 200 C IM = 1 CC C EX IM GL EX IM + 100 C EX = 100 200 1 100 200 + 100 1 300 2 3 = Lesson 28 6 The hypothetical index of intraindustry trade for cars is two thirds If we match dollar-for-dollar imports of cars with exports, we are left with (in this case) $100 billion of imports that are not
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Intraindustry_Trade__Lesson_28_ - Increasing Returns to...

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