rade Facts - rade Facts 1. Over the last 30 years, a rising...

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rade Facts 1. Over the last 30 years, a rising share of world trade has been in knowledge intensive products. 2. Comparative advantage in knowledge intensive products shifts rapidly. 3. Trade between industrial countries rose from 45% to 55% of world trade. 4. Intra-industry trade has grown fastest. Shifts in Demand Income growth shifts demand toward luxuries, and knowledge-intensive goods and product variety are both luxuries. External Economies If demand were the whole story, the relative price of luxuries should have risen, but it hasn't. Economies of scale exist when an x% increase in all inputs leads to a more than x% increase in output. With economies of scale, average costs drop as output increases. Therefore, when demand increases, price can actually fall. One source of economies of scale is external economies. These are the productivity gains and cost reductions that an individual firm reaps from the expansion of other firms in the same industry. In a knowledge-intensive industry, new knowledge is available to every firm either as
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rade Facts - rade Facts 1. Over the last 30 years, a rising...

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