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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 Export Developed Countries Trade Different Resources Developing Countries The Rise of Intra-industry Trade Developed Countries Germany Trade Similar Resources Developed Countries Japan Trade Why do they still have to trade ? Percentage of Intra-industry Trade for Non-food Manufactured Goods Rationales for Intra-industry Trade 1.Demand Effect Product Differentiation Consumers view the products of an industry as close but not perfect substitutes for each other. 2.Supply Effect 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 Microsoft Boeing Nintendo 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. Germany Japan Profit D (0) AC MC MR Still No trade Internal Scale Economies and Trade Unit Cost (No trade) Cost Decrease Unit Cost (Free trade) Price External Scale Economies and Trade D1 D2 S1 (Not include external economies) S2 (Include external economies) Industry’s average cost, including external economies)
