Download GRA 6627 Economics of Innovation Associate professor Per

GRA 6649
International Economics
Lecture 8
Associate professor Per Botolf Maurseth
[email protected]
1
Lecture
plan
Outline
• Taking stock
– Trade between rich countries
– Intra industry trade
• Increasing returns and monopolistic competition
3
Outline – rest of the course
•
Lecture 8: Increasing returns and monopolistic competition
•
Lecture 9: Increasing returns and monopolistic competition - continued
•
Lecture 10: Economic Geography
•
Lecture 11: Economic Geography
•
Lecture 12: The gravity equation
•
Lecture 13: Open
4
Why is there so much trade between US and other
rich countries?
•
•
•
•
•
•
•
•
•
•
Factor content is similar? HOS cannot predict this trade.
Much trade is intra-industry, i.e. trade within commodity groups.
Standard measure of IIT: The Grubel-Lloyd index
Gi = 2 min (EXPi, IMPi)/ (EXPi+ IMPi)
or
Gi = 1 – |(EXPi- IMPi)|/ (EXPi+ IMPi)
for sector i.
A related measure is the net export ratio
Bi = (EXPi- IMPi)/ (EXPi+ IMPi)
since Gi = 1 - |Bi|
5
•
•
•
G = 1 – i |(EXPi- IMPi)|/ i (EXPi+ IMPi)
The index can be applied to a country’s trade with all partners, or bilaterally.
It will normally lower in the latter case. For example, assume that Norway
exports good X to Germany and imports it from France. If IIT is calculated
for Norway’s total trade in X (with all partners), trade with Germany and
France would, taken together, represent intra-industry trade, whereas in
bilateral IIT measures it would not.
6
• Some stylised facts on IIT:
• It varies across sectors, and is higher for skill-intensive sectors. It is
not positively correlated with measures of economies of scale in
production (some results show a negative correlation).
• It is higher in the trade of rich countries, and between rich countries.
• It is higher between countries at similar income levels.
• It falls with the distance between countries.
• For many EU countries, more than 60% of trade is IIT.
• Norway has low IIT, around 1/3 (based on 8-digit HS).
• Oligopoly/concentration: Mixed results as to whether IIT is higher in
sectors with high concentration.
7
Trade is intra-industry:
Intra-industry trade, world
0.35
0.3
share of total
0.25
0.2
0.15
0.1
0.05
0
1970
1975
1980
Year
1985
1992
Trade is intra-industry:
Increasing returns and
monopolistic competition
• Increasing returns: cannot have perfect
competition
• Monopolistic competition
– Many varieties within a commodity group
– Consumers have preferences for more
commodities (an approximation – could be
many different consumers as well).
– Increasing returns: AC>MC
– Free entry ensures zero profits
11
Monopolistic competition
• Must put emphasis on consumers.
• This lecture: Dixit-Stiglitz preferences.
• Autarky market
• Next time:
– Trade
– Trade with transportation costs – home
market effect
12
Literature:
• Lecture notes by Karen Helene UlltveitMoe.
• Lecture notes
• Krugman (1994) ch. 1 and 2
• Feenstra (2004) ch. 5
13