Do consumers benefit from intra-industry trade? Click 'Join' if it's correct. An example from textile sector would be to make yarn related production in Pakistan, processing for cloth in Bangladesh and printing and marketing through India. There are a number of possible advantages of intra-industry trade. Instead, the level of worker productivi… It is not even determined by the general level of education or skill. [link] shows some of the largest categories of U.S. exports and imports. 1 of 12 Which of the following is an economic benefit when countries participate in intra-industry trading? Does intra-industry trade contradict the theory of comparative advantage? In this vision, comparative advantage can be dynamic—that is, it can evolve and change over time as one develops new skills and as manufacturers split the value chain in new ways. The demand for of of intra-industry intra-industry trade. For example, they help to explain the patterns that we noted at the start of this chapter, like why you may be eating fresh fruit from Chile or Mexico, or why lower productivity regions like Africa and Latin America are able to sell a substantial proportion of their exports to higher productivity regions like the European Union and North America. The economies of scale exist up to an output of 40,000 semiconductors; at higher outputs, the average cost of production does not seem to decline any further. It is just that, in working on very specific and particular products, firms in certain countries develop unique and different skills. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Machinery comes in many varieties, so the United States may be exporting machinery for manufacturing with wood, but importing machinery for photographic processing. Indonesia’s intra industry trade is mainly intermediate goods such as primary and processed fuels and lubricant whereas Singapore’s intra-industry trade consists mainly of electronic goods, refined petroleum products, copolymerization, polymerization and natural rubber latex, which in … There are two reasons: (1) The division of labor leads to learning, innovation, and unique skills; and (2) economies of scale. The debate on the benefits of trade has dominated this decade, and Africa has cast its vote for more and better trade with itself. Start by plotting the points on a sketch diagram and then drawing a line through them. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. For example, a single large automobile factory could probably supply all the cars consumers purchase in a smaller economy like the United Kingdom or Belgium in a given year. Instead, how firms engage in specific learning about specialized products, including taking advantage of economies of scale determine the level of worker productivity. Suppose, for the sake of argument, that we focus on the sector “cars”. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. If a country only exports or imports good X (e.g. The concept of economies of scale, as we introduced in Production, Costs and Industry Structure, means that as the scale of output goes up, average costs of production decline—at least up to a point. A measure of the intra-industry trade that takes place between countries is the Grubel-Lloyd (GL) index. Initially comparative advantage was taken as a wider concept but intra-industry trade simplified the product more by breaking them into process and then taking advantage of comparative advantage. At any quantity demanded above 40,000, this economy can take full advantage of economies of scale; that is, it can produce at the lowest cost per unit. However, if a country has only one or two large factories producing cars, and no international trade, then consumers in that country would have relatively little choice between kinds of cars (other than the color of the paint and other nonessential options). Intra-African trade in manufacturing declined from 18% in 2005 to about 15% between 2010 and 2015. Suppose, for the sake of argument, that we focus on the sector “cars”. Intra-industry trade has been a hot topic among trade economists for several decades, but it has received scant attention among economists in general. New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries would then allow those sectors to dominate the world market via a network effect. The prevailing uniform price of imports may induce producers of the highest quality goods to offer high quality goods solely to their domestic buyers and refrain from exporting. Most of Africa’s primary exports undergo little processing before they are re-exported, the report argues, citing cocoa beans from Côte d’Ivoire and Ghana and crude … Ho…, Suppose you are explaining the benefits of free trade and someone states, &q…, Is free trade likely to benefit a large, populous country more than a small …, What are the two main sources of economic gains from intra-industry trade?…, Is it possible to have a comparative advantage in the production of a good b…, EMAILWhoops, there might be a typo in your email. This paper develops a dynamic industry model with heterogeneous firms to analyze the intra‐industry effects of international trade. From earlier chapters you will recall that technological change shifts the average cost curves. increase in intra-industry trade - the intra-industry share of manufacturing trade has increased significantly since the late 1980s, although it varies by country, from around 30% for Iceland to 90% for Belgium. INTRODUCTION Intra-industry trade (IIT) defined as simultaneous export and import of similar goods produced in the same industries is an exchange of highly differentiated goods produced by manufacturing sectors well developed especially in industrialized countries. Intra-industry trade has been a hot topic among trade economists for several decades, but it has received scant attention among economists in general. Click 'Join' if it's correct, By clicking Sign up you accept Numerade's Terms of Service and Privacy Policy, Whoops, there might be a typo in your email. In 2014, according to the Bureau of Economic Analysis, the United States exported $146 billion worth of autos, and imported $327 billion worth of autos. The original H-O theory of international trade is not capable of explaining the intra-industry trade. For example, the United States produces and exports autos and imports autos. Much of their trade is “intra-industry” trade. When complementary trading firms have specialized workers and processes in a particular product, and they engage in intra-industry trade, it creates benefits from working together by creating _____. What are the two main sources of economic gains from intra-industry trade? 50,000 semiconductors? E.g. In the case of intra-industry trade between economies with similar income levels, the gains from trade come from specialized learning in very particular tasks and from economies of scale. Besides a range of country-specific determinants this work has shown that scale economies, product differentiation and imperfect competition are typically important. Donnenfeld, Intra-industry trade and imperfect information 409 The average quality of each country's imports also depends on the distribution of the other country firms, namely dF*(q) and dF(q). All states—and all countries—can benefit from this kind of competition and trade. Greater competition brings with it innovation and responsiveness to what consumers want. Intra-industry trade supports the concept of comparative advantage because it extends the concept from product to different process of product and countries gain greater benefit. Initially comparative advantage was taken as a wider concept but intra-industry trade simplified the product more by breaking them into process and then taking advantage of comparative advantage. sugar) then the GL index for that sector is equal to 0. this question massive intra industry trade contradicts the theory of comparative advantage. Examples of intra-industry trade include technology, beverages, minerals and automobiles. International Trade in Goods and Services: December 2014.” Accessed April 13, 2015. http://www.bea.gov/newsreleases/international/trade/2015/pdf/trad1214.pdf. Thus, production plant M can produce toaster ovens more cheaply than plant S because of economies of scale, and plants L or V can produce more cheaply than S or M because of economies of scale. What can be the economic benefit of having workers of fairly similar skills making cars, computers, machinery and other products which are then shipped across the oceans to and from the United States, the European Union, and Japan? Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers. more important intra-industry trade. For semiconductors, countries like Taiwan and Korea have recently fit this description. In intra-industry trade, climate or geography do not determine the level of worker productivity. Although plant V can produce 200 units of output, it still has the same unit cost as Plant L. In this example, a small or medium plant, like S or M, will not be able to compete in the market with a large or a very large plant like L or V, because the firm that operates L or V will be able to produce and sell its output at a lower price. Intra-industry trade supports the concept of comparative advantage because it extends the concept from product to different process of product and countries gain greater benefit. Can a nation’s comparative advantage change over time? Moreover, this country could also import semiconductors from other countries which also have large factories, thus getting the benefits of competition and variety. As indicated in the beginning of the chapter, producing the iPhone involves designing and engineering the phone in the United States, supplying parts from Korea, assembling the parts in China, and advertising and marketing in the United States. A measure of the intra-industry trade that takes place between countries is the Grubel-Lloyd (GL) index. Instead, they help to broaden the concept. THE East African Women in Business Platform (EAWiBP) has partnered with East African Community (EAC) Secretariat to launch the project on value addition for increased market access in the Moringa products. In fact, it supports the idea of comparative advantage because we know we're taking a concept, given the different processes and the product involved, and the country's gaining greater benefit. A slightly more complex answer is that the country can get these benefits of economies of scale without producing semiconductors, but simply by buying semiconductors made at low cost around the world. trade of differentiated products of a single branch be-tween countries) rather than inter-industry trade is an important and constantly growing modern international sector. Keywords: intra-industry trade, New Member States 1. What we know is that the answer is no. How does the curve illustrate economies of scale? 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