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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