Suppose two countries are identical in their factor endowments. Both would like to consume passenger cars and commercial vehicles, industries with economies of scale. In the absence of trade, each country would have both industries. If they could trade, both could benefit by specialising and taking advantage of economies of scale to lower their production costs.Assume that once trade becomes possible, country A specialises in producing passenger cars, and country B specialises in producing commercial vehicles. a) Explain why we would expect to observe trade in similar products, known as intra-industry trade, when production technology is characterized by economies of scale. [10 points]b) Try to reflect on who are the "winners" and "losers" from international trade in this example [10 points] View keyboard shortcutsEditViewInsertFormatToolsTable12ptParagraph
Question
Suppose two countries are identical in their factor endowments. Both would like to consume passenger cars and commercial vehicles, industries with economies of scale. In the absence of trade, each country would have both industries. If they could trade, both could benefit by specialising and taking advantage of economies of scale to lower their production costs.Assume that once trade becomes possible, country A specialises in producing passenger cars, and country B specialises in producing commercial vehicles. a) Explain why we would expect to observe trade in similar products, known as intra-industry trade, when production technology is characterized by economies of scale. [10 points]b) Try to reflect on who are the "winners" and "losers" from international trade in this example [10 points] View keyboard shortcutsEditViewInsertFormatToolsTable12ptParagraph
Solution
a) Intra-industry trade, or trade of similar products, is expected when production technology is characterized by economies of scale because it allows countries to specialize in specific products and thus produce more efficiently. In this case, both countries have the same factor endowments and could produce both passenger cars and commercial vehicles. However, by specializing, each country can focus on producing one type of vehicle and take advantage of economies of scale, which means that the average cost of production decreases as the quantity of output increases. This leads to lower production costs and potentially lower prices for consumers. In addition, intra-industry trade can lead to a greater variety of goods for consumers and can stimulate innovation and technological progress.
b) The "winners" from international trade in this example would be consumers and producers in both countries. Consumers benefit from a greater variety of goods at potentially lower prices due to economies of scale. Producers benefit from access to larger markets and the ability to specialize in the production of one type of vehicle. The "losers" could be workers in the industry that each country stops producing. For example, workers in the commercial vehicle industry in country A and workers in the passenger car industry in country B could lose their jobs. However, these workers could potentially find employment in the industry that their country is specializing in. Additionally, government policies such as retraining programs could help these workers transition to new jobs.
Similar Questions
A product is produced in a monopolistically competitive industry with scale economies. If thisindustry exists in two countries, and these two countries engage in trade with each other, then wewould expectA) the country with a relative abundance of the factor of production in which production of theproduct is intensive will export this product.B) the countries will trade only with other nations they are not in competition with.C) the country in which the price of the product is lower will export the product.D) neither country will export this product since there is no comparative advantage.E) each country will export different varieties of the product to the other.
Intra-industry trade will tend to dominate trade flows when which of the following exists?A) large differences between relative country factor availabilitiesB) small differences between relative country factor availabilitiesC) uneven distribution of abundant resources between two countriesD) homogeneous products that cannot be differentiatedE) constant cost industries
Intra-industry trade occurs when a country tends to export one good and imports a wholly different type of good from another country.A. TrueB. False
If nations specialize according to their comparative advantage and engage in international trade with each other, each nation can aproduce outside its production possibilities curve bconsume outside its production possibilities curve cproduce more of all goods dshift its production possibilities curve to the right ebecome more self-sufficient
When two countries with different opportunity costs engage in trade based on comparative advantage, the result is: A. Both countries experiencing increased production and consumption B. Both countries producing only goods they have an absolute advantage in C. Both countries experiencing decreased production D. Both countries producing the same goods
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.