International Economics

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International Economics
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Chapter 6 Economies of Scale, Imperfect
Competition, and International Trade
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Main contents
The Heckscher-Ohlin Model and New Trade
Theories Economies of Scale and International
Trade Imperfect Competition and International
Trade Trade Based on Dynamic Technological
Differences Transportation Costs, Environmental
Standards, and International Trade
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Key terms Average costs
labor market pooling dumping
learning curve
marginal cost dynamic increasing returns
marginal revenue external
economies of scale
oligopoly imperfect competition
monopolistic competition forward-falling
supply curve price discrimination
specialized suppliers infant
industry argument
interindustry trade intraindustry trade
knowledge spillovers
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?. The Heckscher-Ohlin Model and New
Trade Theories
Relax the assumptions of the H-O theory
There are two nations, and two factors
(factor-intensity index to predict the pattern of
trade) Both nations use the same technology
(regard as a factor of production)
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Commodity X is labor intensive and commodity Y is
capital intensive in both nations.(empirical
studies indicate that factor-intensity reversal
is not very common in the real world)
Both commodities are produced under constant
returns to scale in both nations.(international
trade can also be based on increasing returns to
scale) There is incomplete specialization in
production in both nations. (complete
specialization)
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Tastes are equal in both nations. (more or
less verified empirically) There is perfect
competition in both commodities and factor
markets in both nations. (half of the trade
in manufactured goods among industrialized
nations is based on product differentiation and
economies of scale)
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There is perfect factor mobility within each
nation but no international factor mobility.
(With some, but less than perfect, international
factor mobility, the volume of trade required to
bring about relative commodity and factor-price
equalization would be less)
There are no transportation costs, tariffs, or
other obstructions to the free flow of
international trade. (they reduce the volume
and the benefits of international trade, but only
modify the H-O and FPE theorem)
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All resources are fully employed in both
nations.(the full employment assumption is for
the most part satisfied) International trade
between the two nations is balanced. (could lead
a nation with a trade deficit to import some
commodities in which it would have a comparative
advantage)

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? . Economies of Scale and International Trade
External economies
?. Economies of scale and market structure
External economies of scale occur when the cost
per unit depends on the size of the industry but
not necessarily on the size of any one
firm. Internal economies of scale occur when the
cost per unit depends on the size of an
individual firm but not necessarily on that of
the industry.
Imperfect competition
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Monopolistic Model and intraindustry trade
The more the firms there are in the industry, the
lower the price each firm will charge.
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CC and PP in Monopolistic Model
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Effects of a larger market
CC1
PP line?
Cost C and price P
CC2
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P1
2
P2
PP
n2
n1
Number of firms, n
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?Base of trade, the pattern of trade
Monopolistic competition
Lower AC
integrated market
Higher P, less firms
A narrower varieties of goods
Consumers different tastes
Exchange of same goods
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?The gains from trade
Producers larger market, larger production
scale, lower AC Consumers more choices, lower
prices
mutual benefit
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Interindustry trade Intraindustry trade
Interindustry trade the exchange of different
goods. Intraindus
try trade the exchange of same
goods.
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manufactures
food
Home (capital-abundant)
Foreign (labor-abundant)
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Theory Factor endowment Trade pattern Income distribution
H-O difference Inter-industry negative
New trade theory similar Intra-industry positive
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Measuring Intra-Industry Trade
Intra-industry trade index (T)
T0 No intra-industry trade
T?0,1
T1 Intra-industry trade is maximum
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Indexes of intraindustry trade for U.S.
industries,1993
Inorganic chemicals 0.99
Power-generating industry 0.97
Electrical machinery 0.96
Organic chemicals 0.91
Medical and pharmaceutical 0.86
Office machinery 0.81
Telecommunications equipment 0.69
Road and steel 0.65
Iron and steel 0.43
Clothing and apparel 0.27
Footwear 0.00
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External economies and
International Trade
Trade Based on Product Differentiation
P
Q
Marshalls conflict
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Marshalls conflict
Specialized suppliers
Concentraded industry
Knowledge spillovers
others
Labor market pooling
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Price, cost(per watch)
C0
1
ACSwiss
P1
2
ACThiland
Q1
Q
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Price, cost(per watch)
C0
1
P1
ACSwiss
P2
2
ACThiland
Dworld
DThiland
Q
Q1
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Dynamic External Economies
and Specialization
Learning curve
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?. Trade Based on Dynamic Technological
Differences
The Technological Gap and Product Cycle Models
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Illustration of the Product Cycle Model
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Synthesis of Trade Theories
Countries Trade pattern Cause Theory
Developed and developing Inter-industry trade Endowment H-O
Developed and developed Intra-industry trade Differentiated products New trade theories
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?. Transportation Costs, Environmental Standards,
and International Trade
Transportation Costs and Nontraded Commodities
Transportation Costs
Traded commodities
Nontraded goods and services
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Transportation Costs and International Trade
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Transportation Costs and the Location of Industry
Resource-oriented industries
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Environmental Standards, Industry Location,
and International Trade