Lecture_03_2011

Lecture_03_2011 - The Global Economy ECON 5319 Beyond Comparative Advantage William J Crowder Ph.D Introduction More Reasons to Trade Trade models

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The Global Economy ECON 5319 Beyond Comparative Advantage William J. Crowder Ph.D.
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Introduction: More Reasons to Trade • Trade models built exclusively on comparative advantage do not always serve to predict a country's trade patterns – Comparative advantage is very difficult to measure – Large share of international trade is not, in fact, based on comparative advantage • Besides, countries often seek to alter their comparative advantages through industrial policies
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Intraindustry Trade Intraindustry trade : International trade of products made within the same industry (steel- for-steel, bread-for-bread) • Intraindustry trade is growing increasingly important in international trade especially between industrial countries Interindustry trade : International trade of products between two different industries (steel- for-bread)
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GL i = 1 X i M i X i M i Measures of Intraindustry Trade Grubel-Lloyd (GL) index : (If X i = M i , GL = 1; all trade is intraindustry) • Problem: Product categories are difficult to define (are computers “office supplies” like pencils?) • Many European countries and the United States have a large share of their total trade that is intraindustry
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Measures of Intraindustry Trade (cont.) • Evidence suggests that intraindustry trade is greater - in high technology industries - where there is more scope for product differentiation - in countries more open to trade - in nations that have received larger amounts of foreign direct investment
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Characteristics of Intraindustry Trade Economies of scale : Decreasing average costs over a relatively large range of output (as opposed to constant or increasing costs) Internal economies of scale : lead to larger firms because size confers a competitive advantage External economies of scale : lead to larger industries (however, larger firms have no inherent advantage over smaller ones)
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Internal Economies of Scale • When larger firms are more competitive, market structure changes Oligopoly : handful of firms produce the entire market output, with each firm formulating its strategies in response to those of its competitors Monopolistic competition : unlike under pure monopoly, competition among many firms exists • However, competition is attenuated by the practice of product differentiation —each firm produces a slightly different product
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Increasing Returns to Scale for a Single Firm
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U.S.-Canadian Merchandise Trade, 2008 (Billions of U.S. $)
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The Gains from Intraindustry Trade Lower prices : An increase in the size of the market allows for scale economies, which lowers production costs and eventually prices to consumers Increase in the number of firms : There is a high likelihood that intraindustry trade expands the number of domestic firms and the quantity of domestic output Increase in consumer choices : Intraindustry trade tends to give access to a much greater variety of goods than produced domestically
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This note was uploaded on 07/16/2011 for the course ECON 5319 taught by Professor Crowder during the Spring '11 term at UT Arlington.

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Lecture_03_2011 - The Global Economy ECON 5319 Beyond Comparative Advantage William J Crowder Ph.D Introduction More Reasons to Trade Trade models

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