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3.1 The Existence of Intraindustry trade 3.2 Technological gap, Product life Cycle and International Trade 3.3 Theory of Overlapping Demands 3.4 Economies of Scale, Imperfect competition, and International Trade 3.5 Reciprocal Dumping
Advanced industrial countries have increasingly emphasized intraindustry trade two-way trade in a similar commodity. Intraindustry trade involves flows of goods with similar factor requirements. countries that are net exporters of manufactured goods embodying sophisticated technology also purchase such goods from other countries.
Exports
60.39 82.7 39.7 24.9 34.4 31.8 29.2 46.1 16.8 8.0
Imports
168.1 81.2 76.9 66.3 34.0 35.2 20.9 20.2 30.2 63.8
costs
in each country produce for the majority consumer tastes within their country while ignoring minority consumer tastes Overlapping demand segments in trading countries Economies of scale
3.1 The Existence of Intraindustry trade 3.2 Technological gap, Product life Cycle and International Trade 3.3 Theory of Overlapping Demands 3.4 Economies of Scale, Imperfect competition, and International Trade 3.5 Reciprocal Dumping
Technological gap is a cause of international trade and determines the flow of international trade.
Export of Country A and B
Production of Country A
T0
T2
T3 Grasp Lag
Imitation Lag
the time lag from the invention of new products in innovating countries to the acceptance of importing countries. the time interval from the invention of new products in innovating countries to generic production until the import is zero. the time lag from the invention of new products to imitation of importing countries.
from imitation to no import until the generic production can meet domestic demand and turn to export.
The technological gap theories explain the causes of trade among different countries from the perspective of comparative advantage, and prove that leading technology can form comparative advantage even among the countries with close endowments and tastes. However, the theory hasnt explained the transfer of trade flow and the causes of the emergence and disappearance of technological gap.
The life cycle of products means all products will experience the course of innovation, growth, maturity and decline.
The
stage of new products The stage of mature technique The stage of standardization
O- t1
the introduction of new products the growing period of products the maturing period of products The innovating country can manufacture the identical cheaper products than the inventing country by native cheap non-skilled labor, sell in the international market and compete with the inventing country. Imitation countries begin to sell products to the inventing country, and the output of the inventing country will decrease so substantially as to come to a full stop. And the life cycle of the products will finish.
t1-t2
t2-t3
t3-t4
After t4
3.1 The Existence of Intraindustry trade 3.2 Technological gap, Product life Cycle and International Trade 3.3 Theory of Overlapping Demands 3.4 Economies of Scale, Imperfect competition, and International Trade 3.5 Reciprocal Dumping
(industrial) countries will likely trade with other wealthy countries, and poor (developing) countries will likely trade with other poor countries. The Linder hypothesis is thus known as the theory of overlapping demands.
Linder does not rule out all trade in manufactured goods between wealthy and poor countries.
There
will always be some overlapping of demand structures: some people in poor countries are wealthy, and some people in wealthy countries are poor. However, the potential for trade in manufactured goods is small when the extent of demand overlap is limited.
3.1 The Existence of Intraindustry trade 3.2 Technological gap, Product life Cycle and International Trade 3.3 Theory of Overlapping Demands 3.4 Economies of Scale, Imperfect competition, and International Trade 3.5 Reciprocal Dumping
Many industries are characterized by economies of scale (also referred to as increasing returns), so that the more efficient production is, the larger the scale at which it takes place.
Where there are economies of scale, doubling the inputs to an industry will more than double the industrys production.
Relationship of Input to Output for a Hypothetical Industry Output 5 10 15 20 Total Labor Input 10 15 20 25 Average Labor Input 2 1.5 1.3 1.25
25
30
30
35
1.2
1.17
A B C Average Cost
100
200
of manufacturing only a few units of each and every product that domestic consumers desire to purchase, a country specializes in the manufacture of large amounts of a limited number of goods and trades for the remaining goods.
Specialization in a few products allows a manufacturer to benefit from longer production runs which lead to decreasing average costs.
South Korea
South Korea moves to the right of Point A along its PPF, the relative cost of steel continues to decrease until South Korea totally specializes in steel production at Point C. Similarly, as the United States moves to the left of Point B along its PPF, the relative cost of computers continues to fall until the United States totally specializes in computers. Both countries can attain consumption points that are superior to those attained in the absence of trade.
In monopolistic competition models, two key assumptions are made to get around the problem of interdependence.
First,
each firm is assumed to be able to differentiate its product from that of its rivals. Second, each firm is assumed to take the prices charged by its rivals as given.
n1
n2
n3
Number of Firms, n
The number of firms in a monopolistically competitive market, and the prices they charge, are determined by two relationships.
On
one side, the more firms there are, the more intensely they compete, and hence the lower is the industry price. This relationship is represented by PP. On the other side, the more firms there are, the less each firm sells and therefore the higher is its average cost. This relationship is represented by CC.
The equilibrium price and number of firms occur when price equals average cost, at the intersection of PP and CC.
number of firms in a monopolistically competitive industry and the prices they charge are affected by the size of the market. In larger markets there usually will be both more firms and more sales per firm; consumers in a large market will be offered both lower prices and a greater variety of products than consumers in small markets.
CC2 P1 P2 1 2
PP
n1
n2
Number of Firms, n
An increase in the size of the market allows each firm, given other things equal, to produce more and thus have lower average cost. This is represented by a downward shift from CC1 to CC2.The result is a simultaneous increase in the number of firms (and hence in the variety of goods available) and fall in the price of each.
3.1 The Existence of Intraindustry trade 3.2 Technological gap, Product life Cycle and International Trade 3.3 Theory of Overlapping Demands 3.4 Economies of Scale, Imperfect competition, and International Trade 3.5 Reciprocal Dumping
In general, the practice of charging different customers different prices is called price discrimination. The most common form of price discrimination in international trade is dumping, a pricing practice in which a firm charges a lower price for exported goods than it does for the same goods sold domestically.