session 6 alternative theories of trade (scale economies, imperfect competition, and trade)

Session 6

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

Trade Facts in Search of Better TheoryAccording to the “comparative advantage”, nations should trade with each others to exploit their production-side differences.

Land-intensive country

Labor-intensive country

Export Export

DevelopedCountries

DevelopingCountries

Trade

Different Resources

The Rise of Intra-industry Trade

DevelopedCountries

DevelopedCountries

Similar ResourcesGermany Japan

Trade

Trade

Why do they still have to trade ?

Percentage of Intra-industry Trade forNon-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 Scale1. Internal Economies Scale

1. External Economies Scale

Global Industries Dominated by a Few Large Firms

Airbus Boeing

Microsoft Nintendo Sony

Monopolistic Competition and TradeMonopolistic is somewhat like “monopoly”

and somewhat like “competition”.Some scale economies exist that are internal to the firm,

but they are moderate.

Germany Japan

MR

MC

D (0)

AC

Profit

StillNo 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)