3 6.1 Introduction Two difficulties with the H-O theory: (1) Some questions remain regarding the empirical validity of the theory.(2) This implies that a great deal of today's international trade still left unexplained.This chapter fills this gap with some new trade theories, which base international trade on economies of scale, imperfect competition, and differences in the development and spread of new technologies over time among nations.
7 6.3 Economies of Scale and International 6.3A. Assumptions(1) There are two nations (N1, N2) two commodities (X, Y)(2) Both nations use the same technology in production.(3) Both nations have the same amount of resources.(4) Neither commodity is labor intensive or capital intensive.(5) Both commodities are produced under increasing returns to scale in both nations.- i.e., Output grows proportionately more than the increase in inputs of production. (eg., If all inputs are doubled, output is more than doubled: Economies of scale.)(6) Tastes are equal in both nations.
9 6.3 Economies of Scale and International 6.3B. ExplanationSome aspects of the analysis:(0) With trade, each nation becomes completely specialized in the production of one commodity.(1) Which of the two commodities each nation becomes specialized may result from historical accident. (2) In real world, the nations need not be identical in every respect.(3) Eventually, one or a few firms in the nation will capture the entire market for a given product, leading to monopoly or oligopoly.(4) The nations may trade similar products in the same industry (i.e., intra-industry trade)
10 6.3 Economies of Scale and International 6.3C. Related Sources of International Trade(1) International economies of scale (Case Study 6-1)- Products manufactured by international corporations have parts and components made in many different nations.- During the past decade or so, there has been a sharp increase in international trade in parts and components, as well as in setting up of production facilities abroad, and these have been the source of new and significant international economies of scale.- E.g., The New International Economies of Scale (Case Study 6-1)
12 6.4 Imperfect Competition and International Trade 6.4A. Trade Based on Production Differentiation(1) Product differentiation and monopolistic competition- Differentiated products: "Neither identical products, nor different products". E.g., Cars, TV sets, etc.- Cf: Standardized (homogeneous) products: "Identical products."E.g., Most of the agricultural products and labor intensive products.- Monopolistic competition: The market organization where there are many firms selling a differentiated product and entry into or exit from the industry is easy.
13 6.4 Imperfect Competition and International Trade 6.4A. Trade Based on Production Differentiation- Cf: Perfect competition vs. MonopolyThus differentiated products are usually produced under monopolistic competition.(2) Product differentiation and intra-industry trade- Intra-industry trade: a phenomenon of international exchanging of differentiated products of the same industry. (As a result of economies of scale, product differentiation under monopolistic competition.)- Inter-industry trade: a phenomenon of exchanging completely different products. (H-O model)
19 6.4 Imperfect Competition and International Trade Key characteristics of Intra-industry trade:(1) While inter-industry trade (eg., trade in the H-O model) is based on comparative advantage among nations, intra-industry trade is based on product differentiation and economies of scale.(2) With intra-industry trade, pretrade-relative commodity prices may no longer accurately predict the pattern of trade.(3) While the H-O model predicts that trade will lower the return of the nation's scarce factor, with intra-industry trade it is possible for all factors to gain.
20 6.4 Imperfect Competition and International Trade Key characteristics of Intra-industry trade:(4) Intra-industry trade is related to the sharp increase in international trade in parts and components of a product.(5) Intra-industry trade arises more between nations with similar tastes and income levels.(6) While most of the trade between developed and developing countries is inter-industry trade, an increasing proportion of the trade among industrial countries is intra-industry trade.
21 6.4 Imperfect Competition and International Trade 6.4B. Measuring Intra-Industry TradeIntra-industry trade index (Grubel-Lloyd index):T = 1 - | X M | / (X + M)If T = 1, perfect intra-industry trade.If T = 0, perfect inter-industry trade.Case Study 6-2. U.S. Intra-Industry in Automotive ProductsCase Study 6-3 Variety Gains with International Trade6.4C. Formal Model of Intra-Industry Trade (Skip)6.4D. Another Version of the Intra-Industry Trade Model (Skip)