Session 6 Alternative Theories of Trade (Scale Economies, Imperfect Competition, and Trade)

Trade Facts in Search of Better Theory According to the “comparative advantage”, nations should trade with each others to exploit their production-side differences. Land-intensive country Labor-intensive country Export

Developed Countries Developing Countries Trade Different Resources

The Rise of Intra-industry Trade Developed Countries Similar Resources GermanyJapan Trade Why do they still have to trade ?

Percentage of Intra-industry Trade for Non-food Manufactured Goods

Rationales for Intra-industry Trade  Consumers view the products of an industry as close but not perfect substitutes for each other. 1.Demand Effect 2.Supply Effect Product Differentiation Economies of Scale  Economies of scale pulls down the price, which the create competitive advantage for an industry.

Product Differentiation VS Scale Economies

Economies of Scale 1. Internal Economies Scale 1. External Economies Scale

Global Industries Dominated by a Few Large Firms Airbus Boeing MicrosoftNintendo Sony

Monopolistic Competition and Trade Monopolistic is somewhat like “monopoly” and somewhat like “competition”.  Some scale economies exist that are internal to the firm, but they are moderate. GermanyJapan

MR MC D (0) AC Profit

Still No trade

Unit Cost (No trade) Price Unit Cost (Free trade) Cost Decrease Internal Scale Economies and Trade

External Scale Economies and Trade S1 (Not include external economies) S2 (Include external economies) D1 D2 Industry’s average cost, including external economies)