CHAPTER 4

Intraindustry Trade

CHAPTER OUTLINE I. Introduction II. Intraindustry Versus Interindustry Trade III. Defining Intraindustry Trade intraindustry Trade Index PASSPORT: Intraindustry Trade in U.S. Foreign Trade Tables 4.1 and 4.2 IV. The Increasing I !ortance of Intraindustry Trade Table 4. de!elo"ed !s. de!elo"ing #ountries V. E"!#anations of Intraindustry Trade in Ho ogenous Products trans"ortation #osts ser!i#es entre"ot and re$ex"ort trade seasonal "rodu#ts VI. E"!#anations of Intraindustry Trade in Differentiated Products di%%erentiated "rodu#ts &ori'ontal !erti#al PASSPORT: ()uilibriu* +it& ,ono"olisti# -o*"etition Figure 4.1 A. (#ono*ies o% S#ale interindustry trade Figure 4.2 intraindustry trade Figure 4. .. T&e Produ#t -y#le Figure 4.4 PASSPORT: T&e /earning -ur!e -. O!erla""ing 0e*ands PASSPORT: T&e U.S. Auto*obile ,ar1et Table 4.4 VII. The $e#fare I !#ications of Intraindustry Trade Figure 4.2 TEACHIN% NOTE& AND TIP& I. Introduction

32

34 -&a"ter 4

Notes In t&e "re!ious #&a"ter5 it +as *entioned t&at all trade #ould not be ex"lained by t&e %a#tor$ "ro"ortions t&eory. T&e "ur"ose o% t&is #&a"ter is to #lose out t&e ex"lanation o% +&at 6#auses7 international trade +it& an ex"lanation o% trade a*ong #ountries in si*ilar "rodu#ts. Teaching Ti! Pre"are t&e students %or t&e di%%erent 6#&ara#ter7 o% t&is #&a"ter. (x"laining IIT is a *essy business #o*"ared +it& t&e logi#al tig&tness o% t&e %a#tor$"ro"ortions t&eory. II. Intraindustry 's. Interindustry Trade Notes T&e "ur"ose o% t&is se#tion is to s&o+ t&at IIT is logi#ally in#o*"atible +it& t&e %a#tor$ "ro"ortions t&eory. T&is sets u" t&e later dis#ussions o% &o+ to ex"lain IIT. Teaching Ti! Interindustry trade and IIT are not in#o*"atible. T&ey are 8ust t+o "arts o% t&e +&ole 9international trade:. ;e<!e ex"lained +&at #auses t&e %or*er and no+ +e<re *o!ing to an ex"lanation o% t&e latter. III. Defining Intraindustry Trade Notes =ou don<t &a!e to 6*easure7 interindustry trade: i% you ex"ort 9i*"ort: "rodu#t > t&en you don<t i*"ort 9ex"ort: it. IIT is not so easy be#ause you are doing bot&. As a result5 you &a!e to ex"lain &o+ t&e IIT index +or1s. T&e se#ond "art o% t&e se#tion is built around Table 4. . For !irtually all ty"es o% e#ono*ies5 IIT is no+ so i*"ortant t&at +e &a!e to s"end so*e ti*e ex"laining +&y it &a""ens. Teaching Ti! ?ote t&at by de%ining t&e IIT index you are #reating a #ontinuu* %ro* @ to 1. Aero de%ines "ure %a#tor$"ro"ortions trade and t&e #loser you get to 1 t&e *ore t&ings loo1 li1e IIT. T&e result is t&at by trying to de%ine IIT you are also getting a loo1 at %a#tor$"ro"ortions trade at t&e sa*e ti*e. IV. The Increasing I !ortance of Intraindustry Trade Notes Table 4. s&o+s t&at IIT is i*"ortant and t&at it is an in#reasingly i*"ortant "art o% international trade %or bot& de!elo"ed and de!elo"ing #ountries. Tables 4.1 and 4.2 gi!e exa*"les o% IIT %or industries in t&e U.S. Teaching Ti! IIT is no+ a "er!asi!e "art o% +orld trade. It is also a "art o% t&e student<s daily li!es. In &o+ *any o% t&eir #onsu*"tion de#isions do t&ey &a!e t&e #&oi#e o% eit&er a do*esti# or %oreign goodB In a +orld +it& only %a#tor$"ro"ortions trade5 it +ould be 8ust one or t&e ot&er.

Intraindustry Trade 33

V. E"!#anations of Intraindustry Trade in Ho ogeneous Products Notes T&e se#tion ex"lains +&y intraindustry trade #an o##ur in so*e &o*ogeneous "rodu#ts. T&e %our ex"lanations are border trade5 ser!i#es5 entre"ot and re$ex"ort trade5 and seasonal trade. Teaching Ti! T&e %a#tor$"ro"ortions t&eory is #on#erned +it& &o*ogeneous "rodu#ts and *ost IIT o##urs in di%%erentiated "rodu#ts. Co+e!er5 you need to dis"ense +it& IIT t&at does o##ur in &o*ogeneous "rodu#ts to 6#lear t&e %ield7 so to s"ea1 %or t&e *ain dis#ussion o% trade in di%%erentiated "rodu#ts. VI. E"!#anations of Intraindustry Trade in Differentiated Products Notes T&e %irst "art o% t&e se#tion is a brie% re!ie+ o% #on#e"ts %ro* *i#roe#ono*i# "rin#i"les. T&e rest o% t&e se#tion is de!oted to t&e t&ree *ain t&eories o% IIT: e#ono*ies o% s#ale5 t&e "rodu#t #y#le5 and o!erla""ing de*ands. Teaching Ti! ;&ile e#ono*ists tend to e*"&asi'e (OS as an ex"lanation o% IIT5 t&e students +ill be *ore %a*iliar and #o*%ortable +it& t&e "rodu#t #y#le and t&e idea o% o!erla""ing de*ands. Co+e!er5 t&e t&ree are not se"arate boxes and t&ey o!erla" a good bit. T&e (OS exa*"le is also an o!erla""ing de*ands exa*"le. VII. The $e#fare I !#ications of Intraindustry Trade

Notes T&ere are t+o "oints to t&is se#tion. First5 i*"er%e#tly #o*"etiti!e *ar1ets are al+ays troubling %ro* a +el%are "ers"e#ti!e as "ri#e is abo!e *arginal #ost. Co+e!er5 t&ere are still gains %ro* t&is ty"e o% trade in ter*s o% #onsu*er #&oi#e *a1ing *ar1ets *ore #o*"etiti!e t&an t&ey ot&er+ise +ould be and allo+ing %or greater e#ono*ies o% s#ale. Finally5 it *ay be easier %or %ir*s to ad8ust to #o*"etition +it& IIT. Teaching Ti! As1 t&e students +&at +ould &a""en to t&eir +el%are i% t&e U.S. banned i*"orts o% any "rodu#t t&at t&e #ountry ex"orts. I% +e ex"ort t&e "rodu#t5 t&en +e *ust &a!e a #o*"arati!e ad!antage in t&at "rodu#t and don<t 6need7 to i*"ort it. T&e loss &ere is a big loss o% #&oi#es and &a!ing #&oi#es i*"ro!es #onsu*er +el%are e!en i% t&ere are no )uanti%iable dollar sa!ings. (RIE) AN&$ER& TO PRO(LE*& AND +UE&TION& )OR REVIE$ 1. Interindustry trade is international trade t&at o##urs +&en a #ountry eit&er ex"orts or i*"orts goods in di%%erent industries. Intraindustry trade is international trade t&at o##urs +&en a #ountry ex"orts and i*"orts goods +it&in t&e sa*e industry or "rodu#t grou".

3D -&a"ter 4

2.

Intraindustry trade is *easured by t&e intraindustry trade index. T&is index indi#ates t&e a*ount o% intraindustry trade e*bodied in a #ountry<s international trade. T&e index is ex"ressed as1 *inus t&e ratio o% t&e absolute !alue o% ex"orts *inus i*"orts di!ided by ex"orts "lus i*"orts. T&e extent o% intraindustry trade is s&o+n in Table 4. . For t&e U.S. intraindustry trade is a""roxi*ately 2E.4 "er#ent o% trade in *anu%a#tured goods. For de!elo"ed #ountries it is 42.@ "er#ent and %or de!elo"ing #ountries it is 44.2 "er#ent. T&e %or*ula %or t&e intraindustry trade index is as %ollo+s: Intraindustry Trade Index = 1 X -M X +M

4.

For a "arti#ular industry or "rodu#t grou"5 > re"resents t&e !alue o% ex"orts and , re"resents t&e !alue o% i*"orts. T&e !erti#al bars in t&e nu*erator o% t&e index denote t&e absolute !alue o% t&e di%%eren#e bet+een t&e a*ount ex"orted and t&e a*ount i*"orted. I% t&e U.S. only i*"orts F1@@5@@@ o% #lot& %ro* India5 t&e se#ond ter* in t&e ex"ression redu#es to 1 by di!iding 9F1@@5@@@GF1@@5@@@:5 and t&e +&ole ex"ression e)uals @. T&is indi#ates no intraindustry trade in t&e #lot& industry. I% t&e U.S. only ex"orts F1@@5@@@ o% *a#&ines to India5 t&e se#ond ter* in t&e ex"ression redu#es to 1 by di!iding 9F1@@5@@@GF1@@5@@@:5 and t&e +&ole ex"ression e)uals @. T&is indi#ates no intraindustry trade in *a#&ines. I% t&e U.S. ex"orts F2@5@@@ in %ood to India and i*"orts F2@5@@@ in %ood %ro* India5 t&e se#ond ter* in t&e ex"ression redu#es to @ by di!iding 9@GF1@@5@@@:5 and t&e +&ole ex"ression e)uals 15 indi#ating t&at 1@@ "er#ent o% t&e trade in t&e %ood industry is intraindustry trade. T&us5 t&e intraindustry trade index ranges %ro* @ 9no intraindustry trade: to 1 91@@ "er#ent o% t&e trade is intraindustry trade:. T&e #loser t&e index is to 15 t&e *ore intraindustry trade t&ere is relati!e to interindustry trade. T&e #loser it is to @5 t&e less intraindustry trade t&ere is relati!e to interindustry trade in t&e sa*e good or ser!i#e. 2. 4. T&e #o*"uted intraindustry trade index is .32. Intraindustry trade in &o*ogeneous goods bet+een #ountries #an o##ur under %our "ossible #ir#u*stan#es. First5 an identi#al and bul1y *aterial su#& as #e*ent %or +&i#& t&e #ost o% trans"ortation is &ig& relati!e to its !alue #an be a basis %or intraindustry trade +&en indi!iduals buy t&e "rodu#t %ro* t&e #losest su""lier. Se#ond5 &o*ogeneous ser!i#es also #an be t&e basis o% intraindustry trade due to t&e 8oint "rodu#tion o% t&e ser!i#e or "e#uliar te#&ni#al #onditions. T&ird5 so*e #ountries engage in substantial entre"ot and re$ex"ort trade. Fourt&5 seasonal or ot&er "eriodi# %lu#tuations in out"ut or de*and #an lead to intraindustry trade in &o*ogeneous goods. Cori'ontally di%%erentiated goods are goods t&at are "er#ei!ed to be di%%erent in so*e slig&t +ay5 alt&oug& t&eir "ri#es are si*ilar. For exa*"le5 #andy bars *ay &a!e t&e sa*e "ri#e but #ontain !ery di%%erent %la!ors or ingredients. Herti#ally di%%erentiated goods &a!e !ery di%%erent "&ysi#al #&ara#teristi#s and di%%erent "ri#es. For exa*"le5 t&e "ri#es and "&ysi#al #&ara#teristi#s o% ne+ auto*obiles !ary enor*ously.

3.

Intraindustry Trade 3E

D.

(#ono*ies o% s#ale *eans t&at as t&e "rodu#tion o% a good in#reases5 t&e #ost "er unit %alls. T&is "&eno*enon also is 1no+n as de#reasing #osts or in#reasing returns to s#ale. S#ale e#ono*ies are internal +&en t&e %ir*<s in#rease in out"ut #auses a de#line in its a!erage #ost. A %ir* t&at &as &ig& %ixed #osts as a "er#entage o% its total #osts +ill &a!e %alling a!erage unit #osts as out"ut in#reases. ;&en t&ere are external e#ono*ies o% s#ale5 a %ir*<s a!erage unit #ost %alls as t&e out"ut o% t&e entire industry rises. .e#ause t&e industry *ay de"end on t&e existen#e o% su""liers or a large "ool o% labor +it& t&e s1ills ne#essary in t&at industry5 external e#ono*ies o% s#ale ex"lain +&y %ir*s +it&in an industry tend to #luster geogra"&i#ally. (#ono*ies o% s#ale #an be a basis %or trade +&en an in#rease in t&e de*and %or a "rodu#t allo+s a %ir* to "rodu#e *ore out"ut and ta1e ad!antage o% e#ono*ies o% s#ale and lo+er unit #osts. ;it& %ree trade5 t&e %ir* +ould be able to ex"ort t&e "rodu#t to %oreign #ountries. T&e "rodu#t #y#le is t&e "ro#ess +&ere goods are "rodu#ed and introdu#ed in a de!elo"ed #ountry re)uiring &ea!y RI0 ex"enses and re%ine*ent in "rodu#tion5 %ollo+ed by "rodu#t stabili'ation in design and "rodu#tion5 and %inally #o*"lete standardi'ation and "rodu#tion in a de!elo"ing #ountry. In t&e %irst stage o% t&e "rodu#t #y#le5 *anu%a#turers o% a 6ne+7 "rodu#t need to be near a &ig&$in#o*e *ar1et +&ere t&ey #an re#ei!e #onsu*er %eedba#1. At t&is "oint5 t&e "rodu#t<s design and "rodu#tion are i*"ro!ed and ad8usted to deter*ine t&e *ost e%%i#ient *et&od o% "rodu#ing it. T&ese design and "rodu#tion en&an#e*ents usually re)uire s"e#iali'ed s#ienti%i# and engineering in"uts t&at are a!ailable only in industriali'ed #ountries. Aside %ro* ser!ing t&e do*esti# *ar1et5 t&e %ir* +ill begin to ex"ort t&e ne+ "rodu#t to #ountries +&ere t&ere is additional de*and %ro* &ig&$in#o*e #onsu*ers. In t&e se#ond stage5 t&e "rodu#t *atures as it be#o*es *ore standardi'ed in ter*s o% si'e5 %eatures5 and t&e "rodu#tion "ro#ess. At t&is "oint5 t&e %ir* *ay %ind it *ore "ro%itable to "rodu#e t&e "rodu#t in ot&er &ig&$in#o*e *ar1ets rat&er t&an ex"ort it %ro* t&e do*esti# #ountry. In t&e t&ird stage o% t&e "rodu#t #y#le5 t&e "rodu#t and t&e "rodu#tion "ro#ess &a!e be#o*e so standardi'ed t&at "ro%it *axi*i'ation leads %ir*s to "rodu#e in t&e lo+est$#ost "rodu#tion site. At t&is "oint5 t&e standardi'ed "rodu#tion "ro#esses #an be *o!ed to de!elo"ing #ountries +&ere using se*is1illed labor in asse*bly$ty"e o"erations 1ee"s "rodu#tion #osts lo+. T&e inno!ating #ountry no+ be#o*es an i*"orter o% t&e "rodu#t. (xa*"les o% "rodu#ts t&at &a!e ex"erien#ed a ty"i#al "rodu#t #y#le in#lude radios5 THs5 H-Rs5 and se*i#ondu#tor #&i"s. ;&ile t&e "rodu#t *ay &a!e started as a 6ne+7 and so*e+&at uni)ue "rodu#t in t&e %irst "&ase5 it ends u" in t&e last stage as a standardi'ed "rodu#t5 +&ere %a#tor abundan#e and lo+$"rodu#tion #ost deter*ine t&e "attern o% "rodu#tion and trade. A##ording to t&e o!erla""ing de*ands &y"ot&esis5 trade in *anu%a#tured goods is li1ely to be greatest a*ong #ountries +it& si*ilar tastes and in#o*e le!els. /inder argued t&at %ir*s +it&in a #ountry are "ri*arily oriented to+ard "rodu#ing a s"e#i%i# !ariety o% a good %or +&i#& t&ere is a large &o*e *ar1et. As a result5 a #ountry<s tastes and "re%eren#es deter*ine t&e s"e#i%i# !ariety o% t&e "rodu#t its %ir*s #an ex"ort to %oreign

E.

1@.

11.

12.

D@ -&a"ter 4

#onsu*ers. T&e *ost "ro*ising %oreign *ar1ets %or t&ese ex"orts +ill be %ound in #ountries +it& tastes and in#o*e le!els si*ilar to t&ose o% t&e #ountry in +&i#& t&e "rodu#ts are "rodu#ed. (a#& #ountry +ill "rodu#e "rodu#ts t&at "ri*arily ser!e its &o*e *ar1et5 but "art o% t&e out"ut +ill be ex"orted to ot&er #ountries +&ere t&ere is a re#e"ti!e *ar1et. 1 . T&e dis#ussion o% intraindustry trade and o!erla""ing de*ands indi#ates t&at #ountries +it& si*ilar in#o*es +ould tend to &a!e a &ig&er "er#entage o% t&eir trade as intraindustry trade. Co+e!er5 de!elo"ing #ountries also engage in a substantial a*ount o% intraindustry trade. So*e o% t&is trade #an be ex"lained as intraindustry trade +it& ot&er de!elo"ing #ountries at a si*ilar le!el o% in#o*e. Co+e!er5 it &as been obser!ed t&at t&ere is also a gro+ing a*ount o% intraindustry trade bet+een de!elo"ed and de!elo"ing #ountries. (x"laining t&is trade re)uires lin1ing !erti#al "rodu#t di%%erentiation +it& o!erla""ing de*ands. In a de!elo"ing #ountry t&ere *ay be a substantial nu*ber o% #onsu*ers +it& in#o*es si*ilar to t&at +&i#& "re!ails in de!elo"ed #ountries. T&e do*esti# "rodu#ers +&o are "rodu#ing %or t&e *a8ority tastes and "re%eren#es +it&in t&e #ountry *ay "oorly ser!e t&ese #onsu*ers. Satis%ying t&e needs o% t&ese &ig&$in#o*e #onsu*ers *ay be *ost "ro%itably a##o*"lis&ed by i*"orting &ig&er$)uality !ersions o% t&e "rodu#ts %ro* de!elo"ed #ountries. T&e re!erse is true %or de!elo"ed #ountries. In t&ese #ountries t&ere *ay be less a%%luent #onsu*ers +&o desire #&ea"er !arieties o% a "rodu#t t&at are not "ro%itable to "rodu#e do*esti#ally be#ause t&e *ar1et is too s*all. T&e solution *ay be to i*"ort lo+er$"ri#ed !ersions o% t&e "rodu#ts designed %or #onsu*ers in lo+$in#o*e #ountries. T&e existen#e o% !erti#al "rodu#t di%%erentiation and o!erla""ing de*ands bet+een di%%erent grou"s o% #onsu*ers in di%%erent ty"es o% #ountries &el"s to ex"lain t&e gro+ing a*ount o% intraindustry trade bet+een de!elo"ed and de!elo"ing #ountries. Intraindustry trade in di%%erentiated "rodu#ts i*"ro!es t&e general +el%are o% a #ountry to t&e extent t&at do*esti# #onsu*ers &a!e *ore ty"es o% t&e "rodu#t a!ailable %ro* +&i#& to #&oose. Additional ty"es o% t&e sa*e di%%erentiated "rodu#t lo+er t&e "ri#es o% t&ose "rodu#ts and i*"ro!e t&e range o% )uality o% t&ose "rodu#ts. For exa*"le5 +it&out Ja"anese auto*obile i*"orts as +ell as auto*obile i*"orts %ro* ot&er #ountries5 U.S.$ *ade auto*obiles +ould "robably be o% lo+er )uality.

14.

*ULTIPLE,CHOICE +UE&TION& 1. K Intraindustry trade: a. o##urs +&en a #ountry si*ultaneously ex"orts and i*"orts t&e sa*e "rodu#t. b. #annot be ade)uately ex"lained using t&e %a#tor$"ro"ortions t&eory o% international trade. #. is *easured using t&e intraindustry trade index. d. all o% t&e abo!e

Intraindustry Trade D1

2.

K K

T&e si*ultaneous ex"ort and i*"ort o% beer by t&e U.S. is an exa*"le o%: a. interindustry trade. b. "er%e#t #o*"etition. #. #onstant returns to s#ale. d. intraindustry trade. . a. b. #. d. Intraindustry trade: #an be ex"lained in t&e sa*e +ay +e ex"lain trade in +&eat or textiles. #annot &a""en i% t&e "rodu#ts in )uestion are di%%erentiated. #annot o##ur i% t&e *ar1et is #&ara#teri'ed by *ono"olisti# #o*"etition. all o% t&e abo!e

4.

K 2.

A large a*ount o% international trade: a. in!ol!es di%%erentiated "rodu#ts. b. is intraindustry trade. #. is based on i*"er%e#t #o*"etition. d. all o% t&e abo!e A relati!ely large a*ount o% intraindustry trade +ould be asso#iated +it&: a. an index o% intraindustry trade #lose to 'ero. b. an index o% intraindustry trade o% .2@. #. a large a*ount o% i*"orts in a "rodu#t #ategory +it& %e+ ex"orts in t&e sa*e "rodu#t #ategory. d. an index o% intraindustry trade #lose to 1.@. T&e gro+t& o% auto*obile trade a*ong de!elo"ed #ountries is an exa*"le o%: a. intraindustry trade. b. interindustry trade. #. t&e %a#tor$"ro"ortions t&eory. d. t&e /eontie% "aradox. ;&en t&ere is balan#ed 9ex"orts e)ual i*"orts: intraindustry trade in a #ertain "rodu#t5 t&e index o% intraindustry trade is: a. @.@@. b. @.22. #. @.2@. d. 1.@@. I% in 2@@25 U.S. auto*obile ex"orts +ere F1@@ billion and i*"orts +ere F @@ billion5 t&e index o% intraindustry trade +ould be: a. @.22. b. @.32. #. @.2@. d. 1.@@.

K 4. K

3.

K D.

D2 -&a"ter 4

E. K 1@. K

A "roble* asso#iated +it& *easuring intraindustry trade is: a. t&e industry or "rodu#t grou"s are +ell de%ined. b. t&e industries do not &a!e t&e data to *easure trade. #. t&e trade is t+o$+ay trade. d. t&e "rodu#ts are not #ounted as ex"orts or i*"orts. T&e intraindustry trade index: a. ranges %ro* @ to 1. b. is @ +&en all trade in t&e industry or "rodu#t grou" is intraindustry trade. #. is 1 +&en all trade in t&e industry or "rodu#t grou" is interindustry trade. d. is #al#ulated by subtra#ting total i*"orts %ro* total ex"orts. I% a #ountry is i*"orting 2@ units o% a "rodu#t and ex"orting 1@ units5 t&en t&e IIT index +ould be a""roxi*ately: a. @.@. b. 1.@. #. @.43. d. @.1. -ountry A i*"orts F4@ in s&irts and ex"orts F4@ in s&irts. Its intraindustry trade index %or s&irts is: a. .D. b. .2. #. F1@. d. FE@. -ountry A i*"orts F2@ in s&irts and ex"orts F2@ in s&irts. Its intraindustry trade index %or s&irts is: a. @. b. 1. #. .2@. d. F1@@. T&e intraindustry trade index is #o*"uted using t&e %ollo+ing %or*ula: a. 9> L ,: b. 9> L ,:G9> M ,: #. N> $ ,NG9> M ,: d. 1 $ N> $ ,NG9> M ,: Intraindustry trade is *ost #o**on in: a. /atin A*eri#a. b. de!elo"ing #ountries. #. de!elo"ed #ountries o% (uro"e. d. all #ountries.

11.

K 12. K

1 . K

14.

K 12. K

Intraindustry Trade D

14. K 13.

Intraindustry trade in &o*ogeneous "rodu#ts o##urs be#ause: a. %oreign "rodu#ts are *ore ex"ensi!e. b. tari%%s *a1e do*esti# good a%%ordable. #. seasonal %lu#tuations. d. lo+er do*esti# #o**uni#ation #osts. ;&i#& o% %ollo+ing is not a reason %or intraindustry trade in &o*ogeneous "rodu#tsB a. Identi#al and bul1y *aterials b. Joint "rodu#tion o% #ertain 1inds o% ser!i#es #. (ntre"ot trade d. Produ#t di%%erentiation ;&i#& o% t&e %ollo+ing is not an ex"lanation o% intraindustry trade in &o*ogeneous "rodu#tsB a. Foreign su""liers *ay be #loser along t&e borders o% a #ountry t&an do*esti# su""liers. b. (ntre"ot and re$ex"ort trade #. Seasonal %lu#tuations in out"ut or de*and d. /a#1 o% resour#es to *a1e a "rodu#t do*esti#ally ;&i#& o% t&e %ollo+ing is not a reason %or IIT in &o*ogeneous "rodu#tsB a. .order trade b. Seasonal trade #. Trade in &o*ogeneous ser!i#es d. Produ#t di%%erentiation Cori'ontally di%%erentiated "rodu#ts are "rodu#ts +&ere: a. t&e "ri#es are si*ilar but t&e "rodu#ts di%%er slig&tly in so*e "er#ei!ed *anner. b. bot& t&e "&ysi#al #&ara#teristi#s and t&e "ri#es o% t&e "rodu#ts di%%er. #. t&e "&ysi#al #&ara#teristi#s o% t&e "rodu#t are identi#al but "rodu#t "ri#es di%%er. d. t&e "&ysi#al #&ara#teristi#s and "rodu#t "ri#es are identi#al. Herti#ally di%%erentiated "rodu#ts are "rodu#ts +&ere: a. t&e "ri#es are si*ilar but t&e "rodu#ts di%%er slig&tly in so*e "er#ei!ed *anner. b. bot& t&e "&ysi#al #&ara#teristi#s and t&e "ri#es o% t&e "rodu#ts di%%er. #. t&e "&ysi#al #&ara#teristi#s o% t&e "rodu#t are identi#al but t&e "ri#es di%%er. d. t&e "&ysi#al #&ara#teristi#s and t&e "ri#es are identi#al. ;&i#& o% t&e %ollo+ing #&ara#teri'es *ono"olisti# #o*"etitionB a. Pri#e #ollusion b. Pri#e dis#ri*ination #. Produ#t di%%erentiation b. Pri#e #ontrols

K 1D.

K 1E.

K 2@. K

21. K

22. K

D4 -&a"ter 4

2 .

K 24. K

;&i#& o% t&e %ollo+ing *ar1et stru#tures is i*"er%e#tly #o*"etiti!eB a. ,ono"oly b. Oligo"oly #. ,ono"olisti# #o*"etition d. All o% t&e abo!e Intraindustry trade: a. tends to be asso#iated +it& di%%erentiated "rodu#ts. b. is ne!er asso#iated +it& !erti#ally di%%erentiated "rodu#ts. #. rarely o##urs bet+een de!elo"ed and de!elo"ing #ountries. d. #an be dis*issed as a data issue. Fir*s in i*"er%e#tly #o*"etiti!e *ar1ets: a. are not able to in%luen#e t&e "ri#e o% t&e "rodu#t. b. #an in%luen#e t&e "ri#e o% t&e "rodu#t by #&anging t&e )uantity o%%ered %or sale. #. are not able to di%%erentiate t&e "rodu#ts +it&in t&e industry. d. &a!e allian#es +it& %oreign #ountries to a!oid double taxation. T&e essential #&ara#teristi# o% a #o*"etiti!e %ir* is t&at: a. it is a "ri#e *a1er. b. it is a "ri#e ta1er. #. t&e *ar1et de*and %or t&e "rodu#t does not exist. d. %ir*s "rodu#e di%%erentiated "rodu#ts. A #o*"etiti!e %ir* is one: a. t&at &as a large ad!ertising budget. b. t&at &as *ono"oly "o+er. #. t&at &as no e%%e#t on t&e *ar1et "ri#e. d. t&at #an raise "ri#es to in#rease "ro%its. A *ono"olist &as *ar1et "o+er be#ause: a. it is a "ri#e *a1er. b. it "rodu#es a uni)ue "rodu#t. #. it &as t&e ability to alter t&e *ar1et "ri#e o% t&e "rodu#t. d. all o% t&e abo!e In +&i#& o% t&e %ollo+ing *ar1et stru#tures is t&ere only one %ir*B a. ,ono"olisti# #o*"etition b. Oligo"oly #. ,ono"oly d. Per%e#t #o*"etition

22. K

24. K

23. K 2D.

K 2E. K

Intraindustry Trade D2

@. a. b. #. d. 1.

;&i#& *ar1et stru#ture is #&ara#teri'ed by only a %e+ %ir*sB ,ono"olisti# #o*"etition Oligo"oly ,ono"oly Per%e#t #o*"etition

K 2.

;&i#& o% t&e %ollo+ing %a#tors #ould "otentially #ause intraindustry tradeB a. T&e existen#e o% signi%i#ant e#ono*ies o% s#ale b. RI0 being an i*"ortant in"ut into t&e "rodu#tion "ro#ess #. T&e o"eration o% t&e suns"ot #y#le d. .ot& A and . ;&i#& o% t&e %ollo+ing is one o% t&e *ost i*"ortant deter*inants o% intraindustry tradeB a. P&ysi#al #a"ital b. Cu*an #a"ital #. Uns1illed labor d. (#ono*ies o% s#ale (#ono*ies o% s#ale: a. are 1no+n as de#reasing #osts or in#reasing returns to s#ale. b. are internal to t&e %ir* i% t&e ex"ansion o% t&e si'e o% t&e %ir* itsel% is t&e basis %ro* t&e de#line in its a!erage #osts. #. are external to t&e %ir* +&en a %ir*<s a!erage #osts %all as t&e out"ut o% t&e entire industry rises. d. all o% t&e abo!e I% out"ut *ore t&an doubles +&en all in"uts are doubled5 "rodu#tion is said to o##ur under #onditions o%: a. #onstant returns to s#ale. b. "er%e#t #o*"etition. #. interindustry trade. d. in#reasing returns to s#ale. (#ono*ies o% s#ale: a. #ontributes to t&e existen#e o% intraindustry trade. b. re%ers to t&e tenden#y %or "er unit #osts to rise +it& t&e le!el o% out"ut. #. do not #ontribute to t&e existen#e o% intraindustry trade in di%%erentiated "rodu#ts. d. ne!er o##ur in t&e "rodu#tion o% &o*ogeneous "rodu#ts. A de#line in a!erage #osts #aused by t&e ex"ansion o% a %ir* is a %or* o%: a. external e#ono*ies o% s#ale. b. internal e#ono*ies o% s#ale. #. ex"ansionist e#ono*ies o% s#ale. d. %ixed e#ono*ies o% s#ale.

K .

K 4.

K 2. K

4. K

D4 -&a"ter 4

3. K

A de#line in a!erage #osts #aused by t&e ex"ansion o% an industry is a %or* o%: a. external e#ono*ies o% s#ale. b. internal e#ono*ies o% s#ale. #. ex"ansionist e#ono*ies o% s#ale. d. industry e#ono*ies o% s#ale. I% t&e #ost o% "rodu#ing a "rodu#t de#lines dra*ati#ally +it& in#reases in t&e le!el o% out"ut t&en: a. e#ono*ies o% s#ale 9(OS: *ay be a sour#e o% #o*"arati!e ad!antage. b. #ountries +it& a large internal *ar1et *ay be *ore li1ely to &a!e a #o*"arati!e ad!antage in t&e "rodu#tion o% t&is "rodu#t. #. t&e le!el o% out"ut and #o*"arati!e ad!antage are unrelated. d. .ot& a and b T&e "rodu#t #y#le re%ers to: a. t&e #&anging lo#ation o% "rodu#tion o% a "arti#ular good o!er ti*e. b. t&e #&anging o% t&e *ar1eting strategy %or a "arti#ular good o!er ti*e. #. t&e #&anging nature o% a "arti#ular good o!er ti*e. d. t&e #&anging "attern o% #o*"arati!e ad!antage o!er ti*e. T&e basi# idea t&at #ertain #ountries s"e#iali'e in "rodu#ing ne+ "rodu#ts based on te#&nologi#al inno!ation +&ile ot&er #ountries s"e#iali'e in "rodu#ing already +ell$ establis&ed "rodu#ts is #alled: a. e#ono*ies o% s#ale. b. "ri*ary and se#ondary *ar1ets. #. "rodu#t #y#le. d. "rodu#tion #ost t&eory. ;&i#& o% t&e %ollo+ing "rodu#ts +ould t&e "rodu#t #y#le least li1ely be a""lied toB a. THs b. -al#ulators #. H-Rs d. -rude oil A##ording to t&e "rodu#t #y#le *odel5 #o*"arati!e ad!antage: a. *ay *o!e %ro* one #ountry to anot&er #ountry as t&e "rodu#t *atures. b. +ill re*ain in t&e #ountry +&ere t&e "rodu#t is introdu#ed. #. is based on t&e in#o*e le!el o% t&e do*esti# #ountry. d. is based on e#ono*ies o% s#ale. ;&i#& o% t&e %ollo+ing "rodu#ts +ould t&e "rodu#t #y#le *ost li1ely be a""lied toB a. -o*"uters b. -o%%ee #. -rude oil d. Seasonal %ruits

D.

K E. K

4@.

K 41.

K 42. K

4 . K

Intraindustry Trade D3

44. K

T&e "rodu#t #y#le %ollo+s +&i#& o% t&e %ollo+ing "rodu#tion strategiesB a. &ig&$in#o*e do*esti# *ar1et5 &ig&$in#o*e non$do*esti# *ar1et5 de!elo"ing #ountry *ar1et b. de!elo"ing #ountry *ar1et5 *oderate$in#o*e *ar1et5 &ig&$in#o*e do*esti# *ar1et #. &ig&$in#o*e do*esti# *ar1et5 *oderate$in#o*e *ar1et5 de!elo"ing #ountry *ar1et d. &ig&$in#o*e do*esti# *ar1et5 de!elo"ing #ountry *ar1et A &ig&$in#o*e #ountry is *ore li1ely to trade +it&: a. underde!elo"ed #ountries. b. &ig&$in#o*e #ountries. #. &ig& "o"ulation #ountries. d. de!elo"ing #ountries. In a &ig&$in#o*e #ountry +&i#& o% t&e %ollo+ing state*ents is true +it& res"e#t to t&e "rodu#t #y#leB a. T&e #ountry +ould tend to ex"ort lo+$"ri#ed !ersions o% goods. b. T&e #ountry +ould tend to i*"ort &ig&$"ri#ed !ersions o% goods. #. RI0 %or &ig&$"ri#ed !ersions o% goods +ould be done in lo+$in#o*e #ountries +&ere labor is #&ea"er. d. T&e #ountry +ould tend to i*"ort lo+$"ri#ed !ersions and ex"ort &ig&$ "ri#ed !ersions o% goods. Intraindustry trade 9IIT:: a. is not&ing but a tri!ial data "roble*. b. #an be analy'ed in exa#tly t&e sa*e +ay +e analy'ed interindustry trade. #. &as not&ing to do +it& trade in di%%erentiated "rodu#ts. d. #an be related to t&e existen#e o% o!erla""ing de*ands. ;&i#& o% t&e %ollo+ing &as not been 1no+n to lead to intraindustry tradeB a. O!erla""ing de*ands b. (OS #. Herti#al "rodu#t di%%erentiation d. Trans%er "ri#ing T&e t&eory o% o!erla""ing de*ands states t&at: a. a!erage in#o*e le!els deter*ine t&e tastes and "re%eren#es o% #onsu*ers +it&in a #ountry. b. #ountries +it& a lo+ a!erage in#o*e are *ore li1ely to trade +it& #ountries +it& a &ig& a!erage in#o*e. #. #ountries are li1ely to trade +it& ot&er #ountries t&at &a!e si*ilar in#o*e le!els. d. bot& a and #

42. K

44.

K 43.

K 4D.

K 4E.

DD -&a"ter 4

2@. K

/inder<s &y"ot&esis t&at #onsu*ers "re%er to #&oose %ro* a !ariety o% goods +it& slig&tly di%%erent #&ara#teristi#s: a. #an ex"lain intraindustry trade. b. *eans t&at #ountries +it& di%%erent standards o% li!ing +ill tend to trade iron %or "&ar*a#euti#als. #. is an ex"lanation %or %a#tor$"ri#e e)uali'ation. d. is an ex"lanation %or di%%eren#es in t&e #ost o% "rodu#tion a*ong #ountries. In t&e t&eory o% o!erla""ing de*ands5 t&e gains %ro* intraindustry trade are a result o%: a. a greater !ariety o% "rodu#ts. b. in#reasing return to s#ale. #. i*"er%e#t #o*"etition. d. re$ex"ort trade. /inder<s &y"ot&esis "ro!ides an ex"lanation %or: a. interindustry trade. b. intraindustry trade. #. #onstant returns to s#ale. d. i*"er%e#t #o*"etition. ;&i#& o% t&e %ollo+ing +ould be an exa*"le o% intraindustry trade based on o!erla""ing de*andsB a. .ourbon b. .eer #. Hol!os d. All o% t&e abo!e ;&i#& o% t&e %ollo+ing is not an ex"lanation o% intraindustry tradeB a. (#ono*ies o% s#ale b. T&e "rodu#t #y#le #. O!erla""ing de*ands d. Fa#tor "ro"ortions ;&i#& gi!es #onsu*ers *ore "rodu#t #&oi#esB a. ?o international trade b. Interindustry trade #. Intraindustry trade d. Al o% t&e abo!e

21. K

22. K

2 .

K 24.

K 22. K

TRUE )AL&E +UE&TION& 1. T 2. F Interindustry trade #annot be ex"lained by t&e %a#tor$"ro"ortions t&eory. Intraindustry trade #an be de%ined as trade bet+een #ountries in !ery dissi*ilar goods5 e.g.5 steel and +&eat.

Intraindustry Trade DE

. F 4. T 2. F 4. F 3. F D. F E. F

T&e %a#tor$"ro"ortions t&eory ade)uately ex"lains +&y #ountries engage in intraindustry trade. Intraindustry trade is t&e situation +&ere a #ountry is bot& i*"orting and ex"orting in t&e sa*e industry. T&e ex#&ange o% auto*obiles bet+een de!elo"ed #ountries is an exa*"le o% interindustry trade. T&e %a#t t&at t&e U.S. bot& i*"orts te)uila %ro* ,exi#o and ex"orts bourbon to ,exi#o is an exa*"le o% interindustry trade. Interindustry trade is t&e situation +&ere a #ountry is bot& i*"orting and ex"orting t&e sa*e "rodu#t. T&e intraindustry trade index #an ne!er be 'ero. Intraindustry trade in t&e +orld e#ono*y is not gro+ing.

1@. F IIT is *ore i*"ortant %or de!elo"ing #ountries t&an it is %or de!elo"ed #ountries. 11. T I% t&e intraindustry trade index is #lose to one %or a "arti#ular industry t&is *eans t&at t&ere is a lot o% intraindustry trade in t&at industry. 12. F Interindustry trade o##urs +&en a #ountry si*ultaneously ex"orts and i*"orts t&e sa*e good. 1 . F T&e *ost #o**only used *easure o% intraindustry trade is t&e %oreign trade index. 14. T An intraindustry trade index o% @ indi#ates t&at 1@@O o% t&e trade is interindustry trade. 12. F I% t&e IIT index %or a "rodu#t #ategory is .E t&en t&ere is !ery little intraindustry trade o##urring in t&is "rodu#t #ategory. 14. F Intraindustry trade only o##urs in di%%erentiated goods. 13. T (ntre"ot trade o##urs +&en a good is i*"orted into a #ountry and t&e sa*e good is later ex"orted to anot&er #ountry. 1D. F Intraindustry trade ne!er o##urs in &o*ogeneous "rodu#ts. 1E. T Intraindustry trade in &o*ogeneous goods #ould o##ur be#ause o% #ross$border trade in goods +it& a lo+ !alueG+eig&t ratio su#& as #e*ent. 2@. T Intraindustry trade o##urs *ostly in di%%erentiated "rodu#ts. 21. F Intraindustry trade o##urs only in !erti#ally di%%erentiated "rodu#ts.

E@ -&a"ter 4

22. T Cori'ontal "rodu#t di%%erentiation is t&e situation +&ere t&e "ri#es and )uality o% #o*"eting "rodu#ts are si*ilar. 2 . T T&e di%%eren#e bet+een a Ford and a -&e!rolet is an exa*"le o% &ori'ontal "rodu#t di%%erentiation. 24. T T&e di%%eren#e bet+een a Rolls Roy#e and a -&e!rolet is an exa*"le o% !erti#al "rodu#t di%%erentiation. 22. F Herti#al "rodu#t di%%erentiation only o##urs in &o*ogeneous "rodu#ts. 24. T In "er%e#t #o*"etition5 %ir*s &a!e little to no in%luen#e o!er t&e "ri#e o% t&e "rodu#t t&ey "rodu#e. 23. T A #riti#al distin#tion bet+een i*"er%e#t #o*"etition and "er%e#t #o*"etition is t&e nu*ber o% indi!idual %ir*s in t&e *ar1et"la#e. 2D. T Cori'ontally di%%erentiated goods are goods +&ere t&e "ri#es are si*ilar but t&e goods di%%er slig&tly in so*e "er#ei!ed *anner. 2E. T (#ono*ies o% s#ale in di%%erentiated "rodu#ts #an lead to IIT. @. F ;&en a %ir* &as external e#ono*ies o% s#ale5 a %ir*P a!erage #osts rise as out"ut o% t&e industry ex"ands. 1. F (#ono*ies o% s#ale #an only be internal to t&e %ir*. 2. F (#ono*ies o% s#ale re%ers to t&e tenden#y %or unit #osts to in#rease +it& t&e le!el o% out"ut o% t&e "lant. . T Intraindustry trade #an be ex"lained in "art by e#ono*ies o% s#ale. 4. F T&e "rodu#t #y#le *odel states t&at ne+ "rodu#ts +ill be "rodu#ed t&roug&out its e#ono*i# li%e in t&e #ountry t&at introdu#es t&e "rodu#tion o% t&e "rodu#t. 2. F T&e "rodu#t #y#le is ex"lanation %or interindustry trade be#ause as t&e "rodu#t *o!es t&roug& its "rodu#t #y#le5 t&ere +ill be #&anges in t&e geogra"&i#al lo#ation o% +&ere and &o+ t&e "rodu#t is "rodu#ed. 4. T ;it& t&e "rodu#t #y#le *odel5 #o*"arati!e ad!antage *ay *o!e %ro* one #ountry to anot&er as t&e "rodu#t *atures. 3. F T&e "rodu#t #y#le &as not&ing to do +it& t&e o##urren#e o% intraindustry trade. D. F Produ#ts sub8e#t to t&e "rodu#t #y#le usually are &o*ogeneous "rodu#ts.

Intraindustry Trade E1

E. F A##ording to t&e "rodu#t$#y#le *odel5 #o*"arati!e ad!antage al+ays stays in t&e #ountry +&ere a "rodu#t is in!ented. 4@. T T&e t&eory o% o!erla""ing de*ands ex"lains +&y trade o%ten o##urs bet+een #ountries t&at &a!e si*ilar le!els o% "er #a"ita in#o*e. 41. F A##ording to /inder5 a #ountry +ould tend to ex"ort goods to #ountries +it& !ery di%%erent "er #a"ita in#o*es. 42. F O!erla""ing de*ands &as not&ing to do +it& IIT. 4 . T /inder<s &y"ot&esis says t&at #ountries +it& si*ilar "re%eren#es +ill trade *ore intensi!ely +it& one anot&er. 44. F T&e o!erla""ing o% de*ands bet+een t+o #ountries +ould tend to redu#e t&e a*ount t&at t&e t+o #ountries trade +it& one anot&er. 42. F T&e *inority taste %or a "arti#ular !ersion o% a "rodu#t in a #ountry &as not&ing to do +it& intraindustry trade. 44. F Intraindustry trade is not an e%%e#ti!e *et&od o% redu#ing t&e *ono"oly "o+er o% do*esti# %ir*s. 43. T ;it& *ono"olisti# #o*"etition5 "ri#e is not al+ays e)ual to *arginal #ost. 4D. F Sin#e t&e +el%are e%%e#ts o% intraindustry trade are di%%i#ult to #al#ulate +e #an sa%ely "resu*e t&at t&ey are extre*ely s*all. 4E. F IIT en&an#es e#ono*i# +el%are in exa#tly t&e sa*e +ay t&at trade based on %a#tor abundan#e en&an#es +el%are. &HORT AN&$ER E&&A1. 2. 0istinguis& bet+een interindustry and intraindustry trade. Su""ose t&at a #ountry<s i*"orts o% #o*"uter #&i"s are F1 billion and its ex"orts o% #o*"uter #&i"s are FD@@ *illion. -al#ulate t&e intraindustry trade index %or t&is #ountry. (x"lain +&at t&e results o% your #al#ulation *ean. /ist and ex"lain t&e reasons %or intraindustry trade in &o*ogeneous "rodu#ts. (x"lain t&e di%%eren#e bet+een &ori'ontally and !erti#ally di%%erentiated "rodu#ts. ;&at is t&e relations&i" bet+een "rodu#t di%%erentiation and intraindustry tradeB ;&at is t&e relations&i" bet+een e#ono*ies o% s#ale and intraindustry tradeB

. 4. 2. 4.

E2 -&a"ter 4

3. D. E. 1@. 11.

;&at is t&e "rodu#t #y#leB Co+ is it related to intraindustry tradeB Use t&e /inder &y"ot&esis to ex"lain t&e %a#t t&at t&e U.S. si*ultaneously i*"orts and ex"orts auto*obiles. ;&y +ould intraindustry trade o##ur bet+een de!elo"ed and de!elo"ing #ountriesB 0is#uss t&e reasons +&y #ountries *ay engage in intraindustry trade. /ist and ex"lain t&e +el%are e%%e#ts o% intraindustry trade.

(RIE) AN&$ER& TO &HORT AN&$ER E&&A1. Interindustry trade is #ountries trading di%%erent goods +it& one anot&er. For exa*"le5 t&e U.S. i*"orts #lot& and ex"orts *a#&ines5 and India i*"orts *a#&ines and ex"orts #lot&. .e#ause ea#& #ountry &as di%%erent resour#e endo+*ents5 #ountries trade !ery di%%erent goods. Intraindustry trade #onsists o% a #ountry ex"orting and i*"orting t&e sa*e good. For exa*"le5 t&e U.S. i*"orts and ex"orts auto*obiles5 beer5 and steel. T&e #al#ulated intraindustry trade index is @.DD. T&is indi#ates t&at t&e *a8ority o% trade in t&is "rodu#t is intraindustry trade. Intraindustry trade in &o*ogeneous goods bet+een #ountries #an o##ur under %our "ossible #ir#u*stan#es. First5 i% t&e #ost o% trans"ortation is &ig& relati!e to t&e "rodu#t<s !alue #onsu*ers *ig&t %ind it #&ea"er to buy t&e good %ro* a %oreign su""lier i% t&at su""lier is #loser t&an t&e nearest do*esti# su""lier. In su#& #ases5 t&e ex"ort and i*"ort o% t&e "rodu#t +ould s&o+ u" as intraindustry trade. Se#ond5 &o*ogeneous ser!i#es also #an be t&e basis o% intraindustry trade due to t&e 8oint "rodu#tion o% t&e ser!i#e or "e#uliar te#&ni#al #onditions. T&e ex"ort and i*"ort o% trans"ortation5 insuran#e5 and %inan#ing ser!i#es to *o!e goods bet+een #ountries +ould s&o+ u" as intraindustry trade. T&ird5 so*e #ountries engage in substantial entre"ot and re$ex"ort trade. ;it& entre"ot trade5 goods are i*"orted into a #ountry and at a later ti*e t&e sa*e good is ex"orted to anot&er #ountry. ;it& re$ex"ort trade5 goods are i*"orted into a #ountry and t&en sub8e#ted to so*e s*all trans%or*ation t&at lea!es t&e* essentially un#&anged "rior to ex"orting t&e* to anot&er #ountry. T&is ty"e o% trade is intraindustry trade. Fourt&5 seasonal or ot&er "eriodi# %lu#tuations in out"ut or de*and #an lead to intraindustry trade in &o*ogeneous goods. (xa*"les +ould in#lude international trade in seasonal %ruits and !egetables5 ele#tri#ity5 and tourist ser!i#es. Cori'ontally di%%erentiated goods are goods t&at are "er#ei!ed to be di%%erent in so*e slig&t +ay5 alt&oug& t&eir "ri#es are si*ilar. For exa*"le5 #andy bars *ay &a!e t&e sa*e "ri#e but #ontain !ery di%%erent %la!ors or ingredients. Herti#ally di%%erentiated goods &a!e !ery di%%erent "&ysi#al #&ara#teristi#s and di%%erent "ri#es. For exa*"le5 t&e "ri#es and "&ysi#al #&ara#teristi#s o% ne+ auto*obiles !ary enor*ously.

2. .

4.

Intraindustry Trade E

2.

,ost intraindustry trade is trade in di%%erentiated goods bet+een #ountries. 0i%%erentiated goods &a!e %eatures t&at *a1e t&e* a""ear di%%erent %ro* #o*"eting goods in t&e sa*e *ar1et or industry. In addition5 *ost international trade in di%%erentiated goods o##urs under #onditions o% i*"er%e#t #o*"etition. A #riti#al distin#tion bet+een "er%e#t #o*"etition and i*"er%e#t #o*"etition is t&e nu*ber o% %ir*s in t&e *ar1et"la#e. Under "er%e#t #o*"etition5 a %ir* #annot a%%e#t t&e *ar1et "ri#e be#ause it is only one o% *any %ir*s t&at "rodu#e !irtually identi#al goods. Under i*"er%e#t #o*"etition5 a %ir* is able to in%luen#e t&e "ri#e o% t&e "rodu#t by #&anging t&e )uantity o% goods o%%ered %or sale. ;&en a %ir* in an i*"er%e#tly #o*"etiti!e *ar1et #an in%luen#e t&e "ri#e o% t&e "rodu#t5 t&is *eans t&at t&e %ir* &as so*e degree o% *ar1et "o+er. I*"er%e#t #o*"etition #an o##ur under t&ree di%%erent *ar1et stru#tures L *ono"olisti# #o*"etition5 oligo"oly5 and *ono"oly. A #o**on ex"lanation o% international trade in di%%erentiated "rodu#ts is t&at t&is trade is a result o% e#ono*ies o% s#ale. (#ono*ies o% s#ale *eans t&at as t&e "rodu#tion o% a good in#reases5 t&e #ost "er unit %alls. To ex"lain intraindustry trade using e#ono*ies o% s#ale #onsider a situation +&ere bot& a U.S. auto*obile %ir* and a Qer*an auto*obile %ir* bot& "rodu#e %ull$si'e #ars and sub#o*"a#t #ars under identi#al #ost #onditions so t&at t&ey &a!e t&e sa*e long$run a!erage #ost #ur!es 9A-:. .e#ause #ost and "ri#e stru#tures are t&e sa*e5 t&ere is no basis %or trade. ?o+5 assu*e t&at bot& Qer*any and t&e U.S. allo+ %ree trade in t&e auto*obile *ar1et. T&e total de*and %or %ull$si'e and sub#o*"a#t #ars in t&e #o*bined Qer*an and U.S. *ar1ets is no+ larger5 and t&is #o*bined larger de*and %or %ull$si'e #ars and sub#o*"a#t #ars +ould allo+ t&e U.S. %ir* to "rodu#e *ore %ull$si'e #ars and ta1e ad!antage o% t&e e#ono*ies o% s#ale. T&e Qer*an %ir* no+ "rodu#es *ore sub#o*"a#t #ars and +ould ta1e ad!antage o% e#ono*ies o% s#ale. ;it& %ree trade5 t&e U.S. +ould ex"ort %ull$si'e #ars to Qer*any5 and Qer*any +ould ex"ort sub#o*"a#t #ars to t&e U.S. As a result5 e#ono*ies o% s#ale #an be used to ex"lain intraindustry trade +&en initial #o*"arati!e #osts bet+een #ountries are e)ual. T&e basi# idea be&ind t&e "rodu#t #y#le is t&at #ertain #ountries5 "ri*arily industriali'ed #ountries5 s"e#iali'e in "rodu#ing ne+ goods based on te#&nologi#al inno!ations5 +&ile ot&er #ountries5 *ostly de!elo"ing #ountries5 s"e#iali'e in "rodu#ing already +ell$ establis&ed goods. T&e t&eory o% t&e "rodu#t #y#le is t&at as a good *o!es t&roug& its "rodu#t #y#le5 t&ere +ill be #&anges bot& in t&e geogra"&i#al lo#ation o% "rodu#tion and &o+ t&e good is "rodu#ed. In t&e %irst stage o% t&e "rodu#t #y#le5 *anu%a#turers o% a 6ne+7 "rodu#t need to be near a &ig&$in#o*e *ar1et5 +&ere t&ey #an re#ei!e #onsu*er %eedba#1 on t&e "rodu#t. Aside %ro* ser!ing t&e do*esti# *ar1et5 t&e %ir* +ill begin to ex"ort t&e ne+ "rodu#t to #ountries +&ere t&ere is additional de*and %ro* &ig&$in#o*e #onsu*ers. In t&e se#ond stage5 t&e "rodu#t *atures as it be#o*es *ore standardi'ed in ter*s o% si'e5 %eatures5 and t&e "rodu#tion "ro#ess. At t&is "oint t&e %ir* *ay %ind it *ore "ro%itable to "rodu#e t&e "rodu#t in ot&er &ig&$in#o*e *ar1ets rat&er t&an ex"ort it %ro* t&e do*esti# #ountry. In so*e #ir#u*stan#es5 t&e do*esti# #ountry5 +&ere t&e "rodu#t +as originally de!elo"ed5 *ay begin i*"orting t&e "rodu#t %ro* ot&er &ig&$ in#o*e #ountries +&ere "rodu#tion #osts are less. In t&e t&ird stage o% t&e "rodu#t #y#le5 t&e "rodu#t and t&e "rodu#tion "ro#ess &a!e be#o*e so standardi'ed t&at "ro%it *axi*i'ation leads %ir*s to "rodu#e in t&e lo+est$#ost "rodu#tion site. At t&is "oint5 t&e

4.

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E4 -&a"ter 4

standardi'ed "rodu#tion "ro#esses #an be *o!ed to de!elo"ing #ountries +&ere using se*is1illed labor in asse*bly$ty"e o"erations 1ee"s "rodu#tion #osts lo+. T&e inno!ating #ountry no+ be#o*es an i*"orter o% t&e "rodu#t. In t&e inno!ating #ountry5 attention *o!es on to ne+ "rodu#ts at t&e early stage o% t&e "rodu#t #y#le. T&e "rodu#t #y#le #an be used to ex"lain so*e o% t&e intraindustry trade bot& a*ong de!elo"ed #ountries and bet+een de!elo"ing and de!elo"ed #ountries. For exa*"le5 a #ountry *ay be ex"orting a ne+ "rodu#t and at t&e sa*e ti*e i*"orting a si*ilar "rodu#t %ro* anot&er #ountry. ;it& t&e #onstant %lood o% 6ne+7 "rodu#ts being de!elo"ed in industriali'ed #ountries5 intraindustry trade o##urs a*ong &ig&$in#o*e #ountries as t&ey ex#&ange t&ese ne+ "rodu#ts +it& one anot&er. T&e *odel also i*"lies t&at &ig&$in#o*e #ountries +ill be ex"orting 6ne+er7 !ersions o% t&e "rodu#t to de!elo"ing #ountries and i*"orting 6older7 !ersions o% t&e "rodu#t %ro* t&ese #ountries. D. A##ording to t&e o!erla""ing de*ands &y"ot&esis5 trade in *anu%a#tured goods is li1ely to be greatest a*ong #ountries +it& si*ilar tastes and in#o*e le!els. /inder argues t&at %ir*s +it&in a #ountry are "ri*arily oriented to+ard "rodu#ing a s"e#i%i# !ariety o% a good %or +&i#& t&ere is a large &o*e *ar1et. In t&is #ase5 a #ountry<s tastes and "re%eren#es deter*ine t&e s"e#i%i# !ariety o% t&e "rodu#t its %ir*s #an ex"ort to %oreign #onsu*ers. T&e *ost "ro*ising %oreign *ar1ets %or t&ese ex"orts +ill be %ound in #ountries +it& tastes and in#o*e le!els si*ilar to t&ose o% t&e #ountry in +&i#& t&e "rodu#ts are "rodu#ed. (a#& #ountry +ill "rodu#e "rodu#ts t&at "ri*arily ser!e its &o*e *ar1et5 but "art o% t&e out"ut +ill be ex"orted to ot&er #ountries +&ere t&ere is a re#e"ti!e *ar1et. For exa*"le5 a U.S. auto*obile %ir* +ill "rodu#e an auto*obile t&at satis%ies t&e tastes and "re%eren#es o% *ost U.S. #onsu*ers. Co+e!er5 t&ere +ill be a s*all nu*ber o% #onsu*ers t&at do not "re%er t&e do*esti# !ersion o% t&e auto*obile "rodu#ed by U.S. %ir*s. In S+eden and Qer*any5 auto*obile "rodu#ers +ill "rodu#e an auto*obile t&at satis%ies t&e tastes and "re%eren#es o% *ost S+edis& and Qer*an #onsu*ers res"e#ti!ely5 but in bot& #ountries t&ere +ill be a s*all nu*ber o% #onsu*ers in t&ese *ar1ets t&at do not "re%er t&e S+edis& or Qer*an auto*obile. In t&e U.S.5 S+eden5 and Qer*any t&ere are so*e #onsu*ers +&o are not able to "ur#&ase t&e !ariety o% auto*obile t&at t&ey "re%er. T&e &y"ot&esis o% o!erla""ing de*ands indi#ates t&at in t&is #ase5 U.S. "rodu#ers #ould "rodu#e %or t&eir do*esti# *ar1et and ex"ort auto*obiles to S+edis& and Qer*an #onsu*ers +&o "re%er t&e U.S. auto*obile. In addition5 S+edis& and Qer*an "rodu#ers +ould be able to ex"ort auto*obiles to U.S. #onsu*ers +&o "re%er Qer*an and S+edis& auto*obiles. T&ese sorts o% o!erla""ing de*ands #an lead to intraindustry trade. O!erla""ing de*ands i*"lies t&at intraindustry trade +ould be *ore intense a*ong #ountries +it& si*ilar in#o*es. In general5 t&e t&eory o% o!erla""ing de*ands #an ex"lain t&e large and gro+ing a*ount o% trade in si*ilar but di%%erentiated goods. It &as been obser!ed t&at t&ere is also a gro+ing a*ount o% intraindustry trade bet+een de!elo"ed and de!elo"ing #ountries5 and t&e ex"lanation o% t&is trade lies in lin1ing !erti#al "rodu#t di%%erentiation +it& o!erla""ing de*ands. In a de!elo"ing #ountry t&ere *ay be a substantial nu*ber o% #onsu*ers +it& in#o*es si*ilar to t&at +&i#& "re!ails in de!elo"ed #ountries. T&e do*esti# "rodu#ers +&o are "rodu#ing %or t&e *a8ority tastes and "re%eren#es in t&e #ountry *ay "oorly ser!e t&ese #onsu*ers. Satis%ying t&e needs o% t&ese &ig&$in#o*e #onsu*ers *ay be *ost "ro%itably a##o*"lis&ed by i*"orting

E.

Intraindustry Trade E2

&ig&er$)uality !ersions o% t&e "rodu#t %ro* de!elo"ed #ountries. T&e re!erse is true %or de!elo"ed #ountries. In t&ese #ountries t&ere *ay be less a%%luent #onsu*ers +&o desire #&ea"er !arieties o% a "rodu#t t&at are not "ro%itable to "rodu#e do*esti#ally be#ause t&e *ar1et is too s*all. T&e solution *ay be to i*"ort lo+er$"ri#ed !ersions o% t&e "rodu#t designed %or #onsu*ers in lo+$in#o*e #ountries. T&e existen#e o% !erti#al "rodu#t di%%erentiation and o!erla""ing de*ands bet+een di%%erent grou"s o% #onsu*ers in di%%erent ty"es o% #ountries &el"s to ex"lain t&e gro+ing a*ount o% intraindustry trade bet+een de!elo"ed and de!elo"ing #ountries. 1@. International trade in#reases +orld e#ono*i# out"ut and +el%are. Alt&oug& intraindustry trade results %ro* di%%erent asso#iated "ro#esses5 +el%are gains also o##ur +it& intraindustry trade. Intraindustry trade o##urs in &o*ogeneous "rodu#ts and in &ori'ontally or !erti#ally di%%erentiated "rodu#ts. In t&e #ase o% intraindustry trade in &o*ogeneous "rodu#ts5 t&e +el%are gains %or a #ountry are si*ilar to t&e +el%are gains under interindustry trade. In t&e #ase o% &ori'ontally or !erti#ally di%%erentiated "rodu#ts5 +el%are gains also o##ur %or t&e #ountries in!ol!ed in t&is ty"e o% trade. T&e gains %ro* intraindustry trade *ay be larger and t&e ad8ust*ent #osts lo+er t&an %or interindustry trade. In t&e #ase o% intraindustry trade in &o*ogeneous "rodu#ts5 t&e +el%are gains %or a #ountry are si*ilar to t&e +el%are gains under interindustry trade. T&ese gains o##ur as t&e traded goods are "ro!ided based on lo+er o""ortunity #osts in t&e %or* o% lo+er trans"ortation5 insuran#e5 or %inan#ing #osts or t&e "ro!ision o% lo+$#ost seasonal "rodu#ts. In t&e #ase o% &ori'ontally or !erti#ally di%%erentiated "rodu#ts5 +el%are gains also o##ur but t&ere are additional %a#tors to #onsider: 9a: Produ#t di%%erentiation en&an#es #onsu*ers< #&oi#es5 but t&e "rodu#ts are "rodu#ed in i*"er%e#tly #o*"etiti!e *ar1ets. In t&ese *ar1ets5 t&e "ri#e is greater t&an t&e *arginal #ost o% "rodu#ing t&e last unit o% out"ut. Furt&er5 i*"er%e#tly #o*"etiti!e %ir*s are #&ara#teri'ed by ex#ess #a"a#ity5 +&i#& *eans t&at t&ey "rodu#e so*e+&at s&ort o% t&e *ost e%%i#ient or least unit #ost le!el o% out"ut be#ause o% e#ono*ies o% s#ale. As a result5 an i*"er%e#tly #o*"etiti!e *ar1et tends to &a!e underused "lants5 and #onsu*ers are "enali'ed t&roug& &a!ing to "ay &ig&er t&an "er%e#tly #o*"etiti!e "ri#es. 9b: Intraindustry trade in di%%erentiated "rodu#ts i*"ro!es t&e general +el%are o% a #ountry to t&e extent t&at do*esti# #onsu*ers &a!e *ore ty"es o% t&e "rodu#t a!ailable %ro* +&i#& to #&oose. 9#: Intraindustry trade is also e%%e#ti!e at redu#ing t&e *ono"oly "o+er o% do*esti# %ir*s. 9d: Intraindustry trade *a1es it "ossible %or #o*"anies to "rodu#e at &ig&er le!els o% out"ut. T&is *eans %ir*s #an en8oy t&e lo+er #osts due to e#ono*ies o% s#ale and "ri#es de#line not only in t&e ex"ort *ar1et but also in t&e do*esti# *ar1et. 9e: T&e ad8ust*ent #osts o% an e#ono*y *o!ing to+ards %ree trade +it& intraindustry trade *ay +ell be redu#ed as t&e #ountries &a!e si*ilar in#o*es and %a#tor endo+*ents.

11.