modern trade theories
TRANSCRIPT
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Modern Trade Theories
International Economics
Chapter 3
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Chapter 3 Modern Trade Thoeries
3.1 The Existence of Intraindustry trade
3.2 Technological gap, Product life Cycle and
International Trade
3.3 Theory of Overlapping Demands
3.4 Economies of Scale, Imperfect competition,
and International Trade 3.5 Reciprocal Dumping
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3.1 The Existence of Intraindustry Trade
Advanced industrial countries have increasingly
emphasized intraindustry tradetwo-way trade ina similar commodity.
Intraindustry trade involves flows of goods with
similar factor requirements. countries that are netexporters of manufactured goods embodyingsophisticated technology also purchase such goodsfrom other countries.
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3.1 The Existence of Intraindustry Trade
Intraindustry Trade in the U.S., 2002
( in Billion of Dollars)
Category Exports Imports
Motor Vehicles 60.39 168.1
Electrical machinery 82.7 81.2
Office machines 39.7 76.9
Telecommunications equipment 24.9 66.3
Power-generating equipment 34.4 34.0
Industrial machinery 31.8 35.2
Scientific instruments 29.2 20.9Transportation equipment 46.1 20.2
Chemicals 16.8 30.2
Apparel and clothing 8.0 63.8
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3.1 The Existence of Intraindustry Trade
Reasons for Intraindustry Trade
Transportation costs
Seasonal
Manufacturers in each country produce for the
majority consumer tastes within their country whileignoring minority consumer tastes
Overlapping demand segments in trading countries
Economies of scale
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Chapter 3 Modern Trade Thoeries
3.1 The Existence of Intraindustry trade
3.2 Technological gap, Product life Cycle and
International Trade 3.3 Theory of Overlapping Demands
3.4 Economies of Scale, Imperfect competition,
and International Trade 3.5 Reciprocal Dumping
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3.2 Technological Gap, Product Life Cycle and
International Trade
Technological gap is a cause of international trade
and determines the flow of international trade.
Export of Country A and B
Time
Production of Country A
Export of Country B
Imitation Lag
T1T0 T2 T3
Production of Country B
Demand Lag
Response Lag
Grasp Lag
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3.2 Technological Gap, Product Life Cycle and
International Trade
T0-T1: the stage of demand lag
the time lag from the invention of new products in innovating countries to theacceptance of importing countries.
T0-T3: the stage of imitation lag
the time interval from the invention of new products in innovating countries
to generic production until the import is zero. T0-T2: the stage of response lag
the time lag from the invention of new products to imitation of importing
countries.
T2
-T3
: the stage of grasp lag
from imitation to no import until the generic production can meet domestic
demand and turn to export.
T1-T3 is the trading period caused by technological gap.
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3.2 Technological Gap, Product Life Cycle and
International Trade
The technological gap theories explain the causes of trade
among different countries from the perspective of
comparative advantage, and prove that leading technology
can form comparative advantage even among the
countries with close endowments and tastes. However, the theory hasnt explained the transfer of trade
flow and the causes of the emergence and disappearance
of technological gap.
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3.2 Technological Gap, Product Life Cycle and
International Trade
The life cycle of products means all products will
experience the course of innovation, growth,
maturity and decline.
The stage of new products
The stage of mature technique
The stage of standardization
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3.2 Technological Gap, Product Life Cycle and
International Trade
Model of Product Life Cycle
Time
Stage 1
Consumption in Inventing CountriesQuantity
Stage 2 Stage 3 Stage 4 Stage 5
T1 T2 T3 T4O
Export
Import
Import
Export
Production in Inventing Countries
Production in Imitating Countries
Consumption in Imitating Countries
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3.2 Technological Gap, Product Life Cycle and
International Trade
O- t1
the introduction of new products
t1-t2
the growing period of products
t2-t3
the maturing period of products
t3-t4
The innovating country can manufacture the identical cheaper products than
the inventing country by native cheap non-skilled labor, sell in the
international market and compete with the inventing country. After t4
Imitation countries begin to sell products to the inventing country, and the
output of the inventing country will decrease so substantially as to come to a
full stop. And the life cycle of the products will finish.
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Chapter 3 Modern Trade Thoeries
3.1 The Existence of Intraindustry trade
3.2 Technological gap, Product life Cycle and
International Trade 3.3 Theory of Overlapping Demands
3.4 Economies of Scale, Imperfect competition,
and International Trade 3.5 Reciprocal Dumping
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3.3 Theory of Overlapping Demands
Wealthy (industrial) countries will likely trade with otherwealthy countries, and poor (developing) countries will
likely trade with other poor countries. The Linder
hypothesis is thus known as the theory of overlapping
demands.
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Linder does not rule out all trade in manufactured
goods between wealthy and poor countries.
There will always be some overlapping of demand
structures: some people in poor countries are wealthy,
and some people in wealthy countries are poor.However, the potential for trade in manufactured goods
is small when the extent of demand overlap is limited.
3.3 Theory of Overlapping Demands
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Chapter 3 Modern Trade Thoeries
3.1 The Existence of Intraindustry trade
3.2 Technological gap, Product life Cycle and
International Trade 3.3 Theory of Overlapping Demands
3.4 Economies of Scale, Imperfect competition,
and International Trade 3.5 Reciprocal Dumping
3 4 E i f S l I f t C titi d
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Many industries are characterized by economies of scale
(also referred to as increasing returns), so that the more
efficient production is, the larger the scale at which it
takes place.
3 4 E i f S l I f t C titi d
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Where there are economies of scale, doubling the inputs to an
industry will more than double the industrys production.
Relationship of Input to Output for a Hypothetical Industry
Output Total LaborInput Average LaborInput
5 10 2
10 15 1.5
15 20 1.3
20 25 1.25
25 30 1.2
30 35 1.17
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Economies of Scale as a Basis for Trade
Pric
e(dollars)
10,000
8,0007,500
O100 275
A
B C
Average Cost
Autos (thousands)200
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Economies of scale provide additional cost incentives for
specialization in production.
Instead of manufacturing only a few units of each and every
product that domestic consumers desire to purchase, a country
specializes in the manufacture of large amounts of a limited
number of goods and trades for the remaining goods.
Specialization in a few products allows a manufacturer to
benefit from longer production runs which lead to
decreasing average costs.
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Trade and Specialization under Decreasing Costs
125D
Tons of Steel100
A
United States
B
C
Computers
South
Korea
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
As South Korea moves to the right of Point A along its
PPF, the relative cost of steel continues to decreaseuntil South Korea totally specializes in steel production
at Point C.
Similarly, as the United States moves to the left ofPoint B along its PPF, the relative cost of computers
continues to fall until the United States totally
specializes in computers.
Both countries can attain consumption points that aresuperior to those attained in the absence of trade.
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
In monopolistic competition models, two key
assumptions are made to get around the problem
of interdependence.
First, each firm is assumed to be able to differentiate
its product from that of its rivals.
Second, each firm is assumed to take the prices
charged by its rivals as given.
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Equilibrium in Monopolistically Competitive Market
Average Cost,
AC and Price, PCC
PP
Number of
Firms, n
E
n2 n3n1
AC3
P1
P2, AC2
AC1
P3
3 4 Economies of Scale Imperfect Competition and
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
The number of firms in a monopolistically
competitive market, and the prices they charge,
are determined by two relationships.On one side, the more firms there are, the more
intensely they compete, and hence the lower is theindustry price. This relationship is represented by PP.
On the other side, the more firms there are, the lesseach firm sells and therefore the higher is its average
cost. This relationship is represented by CC. The equilibrium price and number of firms occur
when price equals average cost, at the intersectionof PP and CC.
3 4 Economies of Scale Imperfect Competition and
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
Monopolistic Competition and TradeThe number of firms in a monopolistically competitive
industry and the prices they charge are affected by the
size of the market.
In larger markets there usually will be both more firms
and more sales per firm; consumers in a large market
will be offered both lower prices and a greater variety
of products than consumers in small markets.
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3.4 Economies of Scale, Imperfect Competition, and
International Trade
An increase in the size of the market allows each firm, given other things equal, to
produce more and thus have lower average cost. This is represented by a
downward shift from CC1 to CC2.The result is a simultaneous increase in the
number of firms (and hence in the variety of goods available) and fall in the price
of each.
Average Cost, AC and Price, P
PP
Number of Firms, n
1
n2n1
P1
P2
CC2
CC1
2
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Chapter 3 Modern Trade Thoeries
3.1 The Existence of Intraindustry trade
3.2 Technological gap, Product life Cycle and
International Trade
3.3 Theory of Overlapping Demands
3.4 Economies of Scale, Imperfect competition,
and International Trade 3.5 Reciprocal Dumping
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3.5 Reciprocal Dumping
In general, the practice of charging differentcustomers different prices is called price
discrimination.
The most common form of price discrimination ininternational trade is dumping, a pricing practice
in which a firm charges a lower price for exported
goods than it does for the same goods sold
domestically.
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Each firm has an incentive to raid the other market,selling a few units at a price that is lower than the home
market price but still above marginal cost.
If both firms do this, however, the result will be the
emergence of trade even though there is no initialdifference in the price of the good in the two markets and
there are some transportation costs.
The situation in which dumping leads to a two-way trade
in the same product is known as reciprocal dumping.
3.5 Reciprocal Dumping