Pugel_14_SG_CH06 - CHAPTER 6 SCALE ECONOMIES, IMPERFECT...

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CHAPTER 6 SCALE ECONOMIES, IMPERFECT COMPETITION, AND TRADE Objectives of the Chapter According to our standard trade theory, a country will export that good in which it has a comparative advantage (such as wheat) and import that good in which it has a comparative disadvantage (such as automobiles). But in “the real world” we observe that countries often both import and export the same type of good! The explanation for this intra-industry trade between nations that have similar factor endowments will focus on the ways in which our standard trade model, based upon comparative advantage and perfect competition, may be oversimplified. In particular, economies of scale (both internal and external), product differentiation, monopolistic competition, and global oligopoly all play a role in explaining how a country can both import and export the same basic product, such as automobiles, computers, apparel, or alcohol. Economies of scale can also help explain why industries locate in some countries and not in others. An interesting implication of these alternative theories is that more people may gain from trade than we had previously thought using the standard models. In particular, under both monopolistic competition and economies of scale, when production expands with the opening of trade, we may experience an added benefit of reduction in the costs of production. As a result, not only will all buyers of goods enjoy a greater variety, but all buyers (including those in the exporting country) will enjoy lower prices! After studying Chapter 6, you should be able to identify 1. intra-industry trade (IIT). 2. the apparent contradiction between Heckscher-Ohlin theory and IIT. 3.
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This note was uploaded on 02/18/2010 for the course ECON 343 taught by Professor Dblack during the Fall '09 term at University of Delaware.

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Pugel_14_SG_CH06 - CHAPTER 6 SCALE ECONOMIES, IMPERFECT...

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