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Chapter_4_New_Trade_Models

We will now relax the assumption that goods are

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We will now relax the assumption that goods are homogeneous and assume that goods are differentiated. Intra-industry trade happens when countries specialize in different varieties of the same type of product and trade them. It deals with imports and exports in the same industry.
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10 Economics of Scale and Intra-industry Trade Intra-industry trade in differentiated goods is mainly due to increasing returns to scale , also known as economies of scales (i.e., a firm’s per-unit costs decrease with output.) The economic justification for economies of scale is that a large organization may reduce costs by specializing in machinery and labor, operating assembling-line production, and obtaining quantity discounts obtained on the purchase of inputs.
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Economics of Scale and Intra-industry Trade If a US firm produces both auto brakes and gas pedals at the output level of 100,000 units, total production cost = $(200+160)*100,000 =$36 million. Suppose a Canadian firm also produces 100,000 units of both auto parts at the same cost . Thus, without specialization, the total cost of producing 200,000 units of auto brakes and gas pedals is $72 million. Auto brakes (1,000) Unit cost ($) Gas Pedals (1,000) Unit cost ($) 200 110 160 90 100 200 100 200
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Economics of Scale and Intra-industry Trade Suppose the US firm specializes in auto brakes and the Canadian firm specializes in gas pedals. Due to specialization, the US firm can use its resources to produce 200,000 units of auto brakes at a total cost of $110*200,000 = $22 million. Due to specialization, the Canadian firm can produce gas pedals of 200,000 units at a total cost of $90*200,000 = $18 million. After specialization, the total cost of producing 200,000 units of auto brakes and gas pedals is $40 million. Specialization saves $32 million in total production costs! Auto brakes (1,000) Unit cost ($) Gas Pedals (1,000) Unit cost ($) 200 110 160 90 100 200 100 200
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13 Economics of Scale and Intra-industry Trade Economies of scale provide additional cost incentives for specialization in production . Economies of scale (or increasing returns to scale) sets the new trade model (the monopolistic competition model) apart from the logic of the Ricardian and Heckscher-Ohlin models because it does not assume countries to differ in technology or endowments.
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Outsourcing A vast array of products consist of materials,
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