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Do you agree or disagree with this statement? “Opening up free trade hurts people in import-competing industries in the short-run, but in the long-run, when people and resources can move between industries, everyone gains from free trade.” Explain your opinion.
200 word minimum
(2012). International economics. (Vol. 1, pp. 82-84). The McGraw-Hills Companies.
In-text citation
(International economics, 2012)
No Wiki, no dictionary.com, please cite all work.
82 lnternational Economics – Vol. 1
Part One TAc Tlreorr of IntenvttintLlTi,ult
sector {the one using the country’s scarce facior intensively;. The changes in prodr:c-
tion have one set of effects on incomes in the short run. but another in the long run.
Short-Run Effects of Opening Trade
In the *$:*rt’t ru* laborers. plots of land. and other inputs are tied to their curreirt
lines of prodiiction. The denand for these t-actors, and therefore the incornes or
returns they earn, depend on the sector in which they are empioyed. Sorre peopie
rvill enjoy higirer demand tbr the factors thev have to offer, because their iactors are
employed in the sector that is atteinpting to expand its production. With the open-
nig to tree trade, the expanding industries in oLrr exarnple are u,heat in the tJnited
States anil cloth in the re st of the world. in the Uniled States landlords in rvheat-
grorving ateas can clrarge higher rents because thelr land is in strong derna*d. U.S.
iurn1**k.rs in wheat-glowrng areas are likelv to get (temporarily) irigher wages.
Foreign clothrvorkers cin also dernand and get higher wage rates. Foreign landlords
in thJ areas raising cotton atld u,ool ibr cloth-making can also get higher re*ts’
rlrLd’rntrii!. rlru rwllrrc vl fcrvrvr., t- th,c clcclir,ir,6 iutlu;tri’+t g.g. a!’31.11′.t’ot!.et’S’
U.S. landlords in areas supplS’ing the cloth-nraking industry, fbreign rvheat-area laitd-
lords and farnrhands- lose income through reduced clemand and therelbre reduced
prices fbr fheir services.
Fol the shorl run” tiierl. gains and losses divide by output secfor: All groups tied
to rising sectors gain, and all groups tied to declining sectoi’s lose. One lvould expect
empiovers. landlolds. and workers in the declining sectors to uttite in protest.
The Long-Run Factor-Price Response
ln the i<,r*q r*-*n factors can move between sectors in respr'rnse to ditferences in
returns. Sellers of the same factor r.viil eventually respond to the inconle gaps that have
been openecl up in the short run, Sorne U.S. clothrl,orkers will fincl better-payingiobs
iu the wlieat sector. r\s the supply of labol into the nheat sector increases. lvages ilt
the rvheat sectol’decline. As the remaining supply af labor to the clolh sector shritrks,
wages in the cioth sector increase. Sorne U.S. cotion- and wool-raisirig land will also
get better rents by converting to lvheat-related producfion, bringing rents in rjilfbrent
areas back in 1ine. Similarlv, foreign farmhands and landlords r,vill flnd the pay better lr,heat sector increase. The full process of the effects olopening trade on l’aclor prices .1.
when the facto|s respond by rnoving to the better-paf ing scctors’ will all n’ages arid -fhe.re-strf’,the ruorid.{each relative to its level r’vith tto trade)’ and
demand. Wlieat grolving is more land-intensive and less labor-intensive than cloth tvi1l not match the amounts being released in the other sector. The imbaiances create ii:i.:,ii;ii:–‘, 1:
l1or.,, Ft’ee l-rade
Ailects Ittcotr:e lnternational Economics, 1 5th Edition 83
Chapter 5 \Iilrr.r (l,rrtts rtncl \Illo Lo.re.r f-on iAt this point^ fhe shor.t-run effects come into play. bi-rt the ecr:noll)’colltinues to ll1ove torvard the longerlr”tn i1 the ljniteci States. for example, exp{tnding wheat production creates demand for
a lot of land and very f-ew workers, whereas cutting cloth productiott releases a lot of change. The prodgction shill toward land-intensive. labor-sparing \l4leat raises rents -[he kind olreasoning makes ttte opposite results hold for the iest of tlie rvorld. ofl in each ol tire trading countries. The gainers ancl losers in fhe sholt ruli are
This passace uses conr.renieni shorthand that is qrrantiiatiirely riague: “‘r lot cf ” lartcl’ “i’rety fet”‘” vvotkets’
and sc on.:Ihese sliouicl give the riqhi rmpressions ir’;iIh a n-rinimurr o1’verbiaqe. Foi rrrote precision aboui
tlre irrplred inequallttes, see the nurneticai exam;rle in the i:ox “A i:acicr-Ratio Pata ln the Rest o{ the Worldln the United States
Wheat expensive, Wheat cheap, lnitial pricesr
Trade opens:
– < al61[-
Pwheat uP, Produce more wheat. Pr”1″u1 down, Produce less wheat. Prices respond Prociuction For each unit o{ wheat For each unit o{ cloth Crucial step- National factor Wage rates fall and rents i Wage rates rise and rents Product prices equalized between countries. Net gains {or both Lonq-run results: ,: l”iTW F1&*&€,s”* Long Rutl’
:-,tj’1.-.l,1..],i,,.].:,,”,.i n.*ino,,,rh” s1i* T1l:t’,1′.n'”lX::x..il”,1ff#ij::T’flJ::f#lt;;:f:J’##;;;;r*v g.arns’^ r, .i. , – r G^+^r r , l — ^.1:.’dlfla
, somel’hat different frou those in the lonq’ryr1.’?'”*o m
the long run. Figprg 52.,d;;;;- th* li*’eossiffiilj$Fi and long runs’
-e$*Hs *F THr H..*’T*4r*RY ‘ :: :1;,*nn-,1ril#f;*11?,1tytr^ffif’.H;o,[*p,*ious The’Stol Per-Samuelson “.s*il+s**rc*;: t*gg’ This’tireorem and ,Four important conditions and tT’#i;j”:#*:i1i;*uly”-:fi ili-3’iff ;;;1ffi :lq*1ii;ltil*ffi ilH!ti*rl;:f”‘m:::l;l’:?’xl”lill'”‘ii[1.’:’:’.’ffi:*;:]Ltlrln*l:H?1″J;”q”‘. can be.relaxed some|h1t €f”:I!:#r[iin pr”a*ing a product double’ .onuun’. return5 to scale then output o{ the .,a
i 90 ,nternational Economics – Voi. i
Patt One Thi, Ihe,rrr .4 litfrinlrtiorr.rl li.i{L
What we ncw know ahlout the mixtures of Leontief decided to test the Heckscher-Ohlin LEdNTIEF.S TEST the H*0 thecry was set. lf the United States was Leontief’s results posed a paradox that puz- BFOADER AND BETTTR TTSTS lbr physical caprtal. highly skilled labor, and unskilled labor. For niediurr-skillecl Figure 5.3 conlinns rvhat rve knolv about the distribrition of the tvorld’s arable Gi.’ E # &.r pi
$1,
$i
$,’ ffi . ,, Part Or-re Ti:. fii..,,r., ll hfenlrirr:r:.rj Jir.:.,
in Figurr’ 6′ I low averilge cost is achieved at iu output size of 100.000 units. Anri horvlarge is the unit-cosr penalty’ fbr sr’alrer ourpur r.*lt, ir”li;;’;.ffi;’L”.*ro** .or,penaltl’lor a scale of 50.000 urtits. conrpaied witli lorvest aver;rse cost at 100.000units” is about 15 percent 1: 12-3 * 2allzal.The ansivers to these questions are inrpor-tant ftrr the type olstructure that arises on the seller sirle of the market.If scale econonies are moclest or moderaie. then there is room in the indirstry fbr alaige nuntber of flrnts. If, in acldition, pr”o,r.ti n.* cilfferertiated. then ne ha’e a strucrure iri which , r&; ;;;;,;#t;;;;,;’:;,;;*;.'”iil*n”;,1,t:”::n”:fi3,.Tj “conornies. -fhe ‘virh il^’i:ij: lot cqmpete,-too aggressiveiy, rtren rr rs possibte for rhe ftrns roealr econofitlc (or p,re) profit’ prolit External Scale Economies second rype of scale economlbs is external to any individual firm. I;xt*r,:l*i:**le ecg:3}*rxi*s are based on the ri.* oiun’*nru=lncuro, wifhin a specific geo-graphic area’ The aver”age cost of the rypicat iirrr’pt”ir”i”g tlre procru6 in rhis areadeclines as rhe output ol ti.,* indrrytn {all the local fitrvithin rrre area is targer. rxt*r,,ui..o,,onries exprain ,n-t};rL;tll,:ltJiilj’fr,il:]||:?ol’some products in specific geographic.r.ur. wrruiu.”,rr. sources of externar scaleeconomi es l) T here are several-pois i tri I i ti es. semiconcluctor. and lnternational Economics, Chapter 6 Sr:rle Econorrtiel, ln’$cfiect Oornperirilrr. rn,l lrtrtlc ::i:’
related fir-rns in Silicon Va1le.v. Ottrer examples of clustering driven by exteriral scale ing. shoes, and accessories in ltaly; and watches in Srvitzerland. ability to analyze infernational trade’
i i:.i I it.iii’ ; r!”i i3 i-j’$ T’ iey gffi ee i”ll fl
According to our basic theories of comparative advantage. if a cotntry trades in a costs). \ve wr:uld see only int€r-t*l*{.*$try gr*d*” in rvhich a coLnltry eKports some While much trade is inter-industr-v, especially in agricultural products and other pri-
rnary procficts. there is also substantial l*i:”i ;r’t:f iilif i !.1;jl.lli iiiii–tivo-way trade in varieties that are such close substitutes that lhe-v are classified rvithin the sanre indus-
trv). Figure 6.2 provides some exarnples of product categories in rvhich the United ics. the amounr that the United States exports is close to the amount that it imporls. splitting the total irade {the sum of exports plus impolts) into two conlpolients. first cornponelt is i3*t cr,}{**. the difference belween expofts and ilnports of that
prochict. Net trade is not intra-industry trade. Rather, net trade shows the product’.s veirtion that net trarle is a positive value if the country is net exporter of the product. Intla-industrv trade is then the otirer corrponent of the country’s total trade irr tlte iarne proriuct category. l’here are tr.vo eqLtivalent \vays to treastlrc tlte atnount of a coutt-
triri intra-industry trade in a procluct. Fils:, it is equal to hvice the value olthe smaller IIT: (.Y + ktt – lx * 1t4i dilferent products or dillerent countries” \re can meastlre the relttlire inrportaltce 0f (I +.1,1) – d- ,1/lftT. ll Illlsnare= —, . .\– r11l lnternational Economica . Vol, l
*S Part One Tl:r- Thearl of lntettuttronalT;rulc
rf*{JH€
For each product, intra’ildustry trade is the difference beiween total.trade atld {the absolute value ofl net trade. The {IT Share is intia-
industfytIad€asapelcent4geoftotaltrade,.].. ..
The,numbers in parentheses xe the Sdigit eode, Stanalard lntemational,Trade Classification, Revision 3.
t ,The values of these vaiious measures are shown in Figue 6,.2. For six of the seren How large lslintra-indlstry tradein geneJal? It is more important for trade. in manufac- of IIT.in the noafood.manufactures trade of’six indestriatized countries. The estimates
are based on dividing the sector,inlo over 1,3’00’diftrent prOducts”‘To develap:the overall average).|The fine’level,ofproduct detail is necessary so’that we have mean- tWe can show the formula for this weighted average of llT- shares. To be clegr, let us add the subscript
I to the value for each products exports,and:’import5, to emphasize that we are ar.’eraging over a
number of different PlQduct categories.
How lm portant ls’lntra.lndustry ifaAef
tn this formula, tho first katio) term is thle propcrtionate weight lor each produci category,, and the
serond tetm is the calculated llT.share for each product category’ :
IntraJndustry Trade for the United States, Selected Products, 2009
] t’,r,n,,.-r,] lnternational Economics, 15th Edition I 1’09
Chapter 6 Sc,rL’ Ecrr)l0r.rri(i’ ltnlri’iiccr ( ‘r’]nJ)’ iiiiiltl ({llrl J Avelnge
Perceutage
Shates o{ intra- Country
United 5tates Germany 1989
55.3 2S05
58.3 67,’ tr. F’ g:;
*!’i ir i,,
i, .1. :.’ .. Iol e thflll hal l of overll l is n’
trade for rtost intiustliaiized ,ount’it” The e’riilrates ore based on ot”er ploduct
.*ijeo’i*'(fhe5-ttigittereloftlreSl.1’C.iter,isiorr2).
!t!ttilu!i,’tu! Itt,h hl’l trntnoli!r ll’tralwv ‘
$pwafrl rvhicir codd happen if we instead tsed broad p{O€luct categofies i1 \ve wollld be {rr:istakeniyi tind;ng {l’f rvhen a country expofiS “ap1}les” and ‘:orrr,g.r;’ tir ihe too-broad prodtlct calcgory *’as As r,,,e can see ir’r tigur.L.3, tb.fir.e’of ihe six countrjes. IIT is rrore total trade in nonfood ,ianut’acrures. ln additioo, the ilnportance in the past several decades f-or:lll these cortnffies. f he iuttto** is especiallS’iarge Japan. h} this aspecl of its itade, Japan it still rlifl’elent li’E:in most ather indttstrialized
Cou11tl’ies”btititisn0w1es5c]il1-ererrtthanitLl5edt0be. and ,transporr cosrs aie J;;;: ;;;;lti,, f,=iaontial-trade areas like the Europeatr Unio” is nar:row-
ing. tjror.igh. lbr the Oeoelopirrg cogntries fik* bhit’o that are iniegratirrg econony, Sy 2004. tfi* ot*ug; share ol ilT in llhina s tlade in nolltbod prodilcts had riscn to 4t.i percent.
What Explains lnfa’lndustry Trade? some mea-
,ur*,] ltt probably reflects trade tlrir,’err by comparative advantage’ For in-stance,’ a that ate Fr$duceci using dil.ferent productign the united States nay exBol’t ipecific products that are produced using ;ni*,iuiuety nnd impoir oifi*t:tp*citic piodgcts that are prnducecl ‘ln ihe analysis of intra-industry tra(ie, a’.’ieil-defined rrierveri as close sui:stitutesiy.ontrrn.ro a,rci prodL:ci-cl using verylimiiar ;;;;;;;;or.n to tt.tn deiinitiorr oi an indi.istry stressed in lhe l-leck*ciret-Chirn thecry acivantage, Altlrough we.;;;;i’p;;ti .t…n Jt these over 1,30t) product caiegori€s deiinitisi r, il seems unlikelv ihat lhe c&iegorles generaliy ate 110 lnternational Economics – Vol. 1
Part One T’lre ‘fleln: of Inrrtirrtionrrl Ttrrl.
intensively. As another example. for some agricultural products. III-‘measurcd over a Much intra-industry trade is driven by something other than comparative aclvan- Procluct differentiation easil-v can be a basis for ffade. Sonre buyers in a country Yet. it is not only producf differentiation at r.r’ork in this explanation. Taken to ihe :.,i i: i.j ii Fli.l: t $ i? i { {_ i:} re ::} il’Ti ?’ + 4:.} ix,e. ili i}’r & & t} r ant to import Yet. it is not only producf differentiation at r.r’ork in this explanation. Taken to ihe
in the cloth-relate
in the long run is summarized in Figure 5
rents be bicl back to their pretrade levels’l No. tliey will not. In the long run. wage rates
encl r:p lorver tbr att U.S. workers and higher for all frrreign workers (each relative to
its leve1 with no trade). A1l land lents end up liigher in the United Stales and lower in
What drives thrs crucial resuit is the imbalance in the changes in factor supply
making. Therefbre, the amounts o1’each factor beitrg hired in the erpandillg sector
pressures f’or f-actol prices to adjust.
Distribution
rn the L-ong
Rr:n: The
l1’hole Chain of
inl-luence
-Ir.r.Jt”
etfects shorvn in the rest ofthis fisure.
workefs and not so fiuch lancl.1 SrNnethirrg has to give.’fhe onl’; \\/ay the etnploynlent
of labor nild land can acljusi to the available national supplies is for tactor prices to
and crrrs \L/ages thrtntglrtni the Liniteci States in the long run. The rise in rents alld lhe
fa11 in ruagei Lroth continr-te until producers cor:le up rvitll ttrore land-saving and labor-
gsiltg ways of rnaking wheat aud cioth. Once they do, rents aurl rvages stabilize-{:rrt
Li.S. renls stili eld up higher ancl ra,ages lower than betbre trade opened up.
sane
‘L”ade. then. makes some people absoluteiy better oll and others absolutely worse
cioth cheap
cloth expensive
wheat–*->.
P.1o,5 down
Produce less cloth.
Pcto& uP
Produce more cloth,
to trade.
responds to
prices.*
sacri{iced, much land and few
workers laid off; extr”a cloth
demands many workers
and little land,
sacrificed. many workers and
a small amount of land laid
of{; extra wheat demands
few workers and much land.
National factor
markets
change.
prices respond.
rise {in both sectors). j iall (in both sectors}.
countries but different ef{ects on different groups. Wilners: U’S’
lando,,n;ners, foreign workers. Losers: U’5′ workers, {orelgn
landowners,
y*r S#?7. Part O:re
Winnersaild
Losers; Sliart
Run versus
:’:.’::l:t”;tlt”lr”””..lt;”.’1″.-:;;::*::,*::;J; lea’ing zero net gai:r’ lnthe long run
botli coutrties get net
i;’*;# *;i;tt*niex of displaced bctors’
mlie adjus”yent can oicur
*o io.*” in the’short
THRtrE ls/lPtlcAl tu*s
‘
, . nplications for factor incomes. rhese,
secdon :
Theorem
state; tal” grv’en cenain conditions
assumptions “”1’1’1^t:iifi”:t’,’.-ii[;:ll,$-:1T}’Jl1J;1″,.
Ix'”‘””
are fixed. though rhis
…i,fr'”;’ ‘.’]1u.,
(e.9., it all TaclUI5 u>cu ll l H’ “*-
producr qoubles)’ ‘i
‘:l
productive factors that make up the exports and
imports of leading nationi has been learned
largely because Wassily Leontief was puzzled
in the 1950s. Leontief. a Nobei prize winner in
economics. set off a generation of fruitful debate
by foliowing the soundest of scientific instincts:
testing whether the predictions cf a theory really
fit the facts.
theory that coun’tries will export products whsse
production requires more of the country’s abun-
dant factors and import products whose produc-
tion relies more on the cauntry’s scarce factors.
He assumed that the U.5. economy at that time
u,’as c;pital-abundant (and labor-scarce) relative
to the rest o{ the world.
‘OI
Leontief computed the ratios of capital stocks
to numbers of wcrkers in the U.5. export and
import-competing industries in 1947. This com-
putation required figuring out not only hcw
much capital and labor were used diretly in each
of these several dozen industries but also how
much capital and labor were used in producing
the maierials purchased from other industries.
As the main pioneer in input*output analysis, he
had the acivantage of knowing just how to multi-
ply the input-output matr;x of the U.5. economy
by vectors o{ capital and labor inputs, export
vaiues, and import values to derive the desired
estimaies of capitalllabor ratios in exports and
import-competing production. 5o the test of
relatively capitai-abundant, then the U.S. export
bundle should enrbody a higlier capitailiabor
ratio {K,/1,), tfran the capital/lat}or ratio embod-
ied in the U.5. production that competed nrith
imports (K^lL*).
zled hirn and others: ln 1947, the Uniteci States
was exporting relatively labor-intensive goods
to the rest of the world in exchange for rela-
tively capital-intensive importsl The key ratio
(K,/L,J||K_/L^) was only 0.77 when !-l-0 said it
shoutd be well above unity. Otiler studie3 con-
firmed the bothersome Leontief paradox for the
United States between World War ll and ‘ig70.
The most fruitful response to the paradox was
to introduce other factors of production besides
just capital and labor. Perhaps, reasoned many
economists iincluding Leontief himself), we
should make ure of the fact that there are .dif-
ferent kinds of labor, different kinds of natural
resources, different kinds of capital, anci so forth.
Eroader.’calculations of factor content have paicl
off in extra insights into the basis for U.S. trade.
True, the United States was somewhat capital-
abundant, yet it failed to export more capital
services thah it imported. 8ut the post-Leontief
studies showed that the United States was aiso
abundant in farmland and highly skilled labor.
And the United States was indeed a net exporter
of products that use these factors intensively, as
H-O predicts.
labor. the international contrasts are not neariv so sliarp. Countries have them in shares
that tencl to be in the nriddle of the abundance -scarcitv spc.cffum. with C,-hina being
an interesting exception.
(farrnable) land an
&l’
si,&r.”
F
*-l
Hi
F3,
Hi
R
g.
H
tc
F’
B
&
*,,i
4ti!.
f+r
$il
Fr.
$i,
‘rildibnn of- i mperf’ect colt.lpetition cal I ecl,…,,,,,,.,,,, _,,, 1,,. ; ;,
producing and seJling varieties.of the basic ptorti*r fJecause each firm,s proclirct issomeu,har criffere’nt. each firm rras some co,riroi;;..;;;;;;;.;;;;;,’:i,;r*., rbr irspt’oduct’ -l-his cttrltrasts with the perfectly cornpetitive narket structure Lrseci in stan-darcl trade fheorlr wrth perlbct conrplrtitiol, each of the inciListry s rnany snrall firnsproduces an identical cotrluodity-lile proouct, ,or*r the market price 65 given, ancibelie’es rhaf it has no direct contr.or or intir,.n.. o”-ri,i, market prce.If scale econotnies ale subsrantial,or.er u rrrt.-rung. of output. then it is likely tliat afblv tlrnts wili grow to be large in.ordei’to reap’ttie-icir*e
I j.a ferv lan:e tirn-rsdominate the glohal inrltrtlr.l rrer*pno-be..r”‘..,.g.r.riohrtrdr buarc econ0nltis, then wehave an :;i:’ . ‘ .
large iirms’i,, un origoplrl;’l;; that the1, can conrror or inflr-r-ence pdces’;\ ke,r’issLte in on ortgopoty i, irJ*ju.ilu-lf drgrg large rir.rns cor,pere
eaclt other
-qreater than tire noi’nrut retur-n to inuerte,l capital.In a iater section of this cltapter. we present in-rlepth anal;,sis of hos, r\€ cau usemonopolistic competition to better unclerstand ttre clririers and irnplicatio’s of interna-rionai trade’ we then take a lock at the rore oi”;;il;;;in inrernarionar rracre.
‘fhe
External ecotlonttles can arise if concenlration of an industryls flnls in a ge0graphicarea arracts greater local supplies of specializ.o ,*roi.*u ior the inclustry or iarger pooisof specialized kinds of laboirequired b1.the il;r.),’;;;” r*o*on lhal filmrnakins trmsclusrer in Hotvrootl lancl irr Niunibai” fornierrl.. Bo;;; il;. il;;.ilffi,;wood.)is that a deep pool of r’vorkers sr
.l
5th Edition 1A7
economies include banking and flnance in London and in New York City; stylish clotlt-
The final seclion of this chapter examines how extertral scale econotriies add to our
product, ii shsuicl either urostlv export the product (based on its relatively loiv prOdttc-
tiot-r co.ts) or mostly import the product {as a result of its relatively high production
products in tracle lbr irnports of other. qLrite diflerent products’
rvhictr a corntry both exports and inrports the same or very simiiar products (p:oduct
Siates engages iri intra-industfy tlacle. For exanple, tbr each of pelfitntes and costnet-
We cau quantib/ the relative importance of IIT in a cortntry’s trade in a productby
‘Ihe
importance in the country’s inter-industry trarle. in which son”ie products are (net)
exported. and other products are (net) irnportecl. In measurentent rve often use the con-
and it is a negative value if the country is net importer of the product. {Tlie “positive”
and “negative” are nct vaiue judgments. just ways clf nreasuring.)
proclgct, the an-iount of trade in rvhicli the country is both exporting and importing in the
of expotts or imports icapfrriilg the amount of exporting of the prodrict fhat is nratched
b1′ the sarr’le arlrount of importing ol the proclLict). Second IIT is the part of total trade
in the product (expolts plus irlports) that is not net trade. Using this latler approach,
rvbere X is the value ol export$ ol the. product and .44 is the vah.ie of imports o1’the
prorluct. Fnrrherntore. rve often \yant to compare the irnportance of IIT across different
prr:ducts or ciiltbrent countries. Because the total amotlni of trade diftbrs naftrraliy tbr
intra-industrv trade. as a share ol total trade:
lotal tradr
ll- I – rx+ hktx + h{)
Source: Data & exports and imports fmm UnitedNationS,,Cammodit!: Dilision, IlilCantrade DstabLte.
products (all butlargeaircraft),roverhalf of U.S.’total trade,inthe product is IIf.
twed.products that it is for tade in agricultrnal products and other primary products,
so let’s focus on nonfcod, manufactured productsi Figure 6.3 shows the average share
estimatei..the uT shareis calc$lated far’eachofthese,products, and then the weighted
average is.catculated,aoross all these’products (using the counhy’s total trade in the
produ;t as weights, so:that prodtrcts,with m-.ore total trade receive more weight’in lhe
ingful, narrowly;defiued indus111-es W-e,t{y to-aVoid brasing the measurement of IIT
jiitl’
lnilusfry Trade
irr the Countr:yi
Total Ti’ade
in Nonfood
Manutactured
Frodricts
L dildud
t^^-^)dPdt I
France
United Kingdom
54,3
l/.6
62.6
71 .3
69.0
63.2
41.2
13.9
11 -1
$rl
F.
il.
sir..
t”.:
! ::l
i:i
a;
For $ade il iloulbarl malufucturerl goocls (slTC 5 throtrghSi, il1tla”in
l ‘J00 tlillerent indn’idta]
*arich
irlpCIlts
“fruit”)lt ,,-
tllftn h1l1.Ltt-
of II’l has tieet rising
tbr
trve know fr.orll otirer studies that II’t is mcre pfevaletli-where tratie balriers
i;t-i!t.6.3. the aveiage IIT:shar”es are particularly high lbr the iitr*e E*ropean
cou*rries. Furrhermcre,ltr. i, nrore chalacieristic ol rhe {higlr-lncome) ilrduslri-
aiir*J .”””tti*s. aod average tlT sk*tes tencl to be lorver tbr the (lor’-itlcolne]
#;Jiopl;’.-i,.itr*. ror ittsTance, for, Clhtnai rade in-I992′-the ave.rage ttl shlt1 l.,lr
its trarle in nonfoOd nratlufactures’was 20,9 pefcent’ Even:this ditference
into the glottai
irtanufactured
why elo \ve’see so much intra-inclnstry trade’i’rhele are several reasoils’
,producr caregory *ui’Siili ne ,io” liroad- so ttrai it.include.’i tlifferent products
tuetilodS’ Rrithin a cal*gol’y: ior ittstanee’
skilled labor
rtsing unskilled iab*t:
product category.con:ists of prclduct varie{ier
f*ctor proporlions’ ihe la,tter..is
of coirrpalallve
n-ie’eis lltis
too btoac’
Year may reflect seasonai comparative advantages. The Uniled States expor”ts cherries
in July but irrports cherries in January.
tage. and the leading explanation focuses on the role of glr*{**{t *jff*r**€*;l?i*r,–
consLlmers view the varieties of a product otTered by difierenl lilns irr an industrv as
close but not perfect substitutes for each other. We can see the roie of diiTerentiation
for the products sliown in Figure 6.2. Product difl’erentiation is rampant in perfumes
and cosn’:etics, r.vith strong brand na;nes. exotic packaging. and rvide-ranging claims
for eff-ectiveness ancl high quality. For clothes wa-shing machines. brancls tiom out-
side the tJnited States. including lVliele. Bosch, LG, Samsung, and Flaier. contpete
ivith Whirl;:ool. Maytag, GE, and other U.S. brands. in integrated circuits there is
ciifl’erentiation by specific circuit design as nell as by functional specificarion, rvitir
U.S. firms like hitel. Texas Instrunenls. and Micron battling with tbreign iirms like
‘foshiba” Samsung” and Infineon. f-he range of automobile models on oi’fur is obvi-
ouslv very large. {n iarge civilian aircraft the two firms are Boeing_ and Airbgs. rvith
each offering models tliat compete rvith the other\ models on design, lechnolerg1,. apg
otlter specifications. For cameras. consruners can choose fiom a range of branc{ names
(including Canon. Sonv” Samsung, Kodak. and General Electric) and ntodels that clif-
fer by fbatures and qnalit.v.
prefer varieties cf the product produced in a foreign country, so thev
extleme, each of-ns rvould u,anl to bu-v the riniclue product variant that exactly matches
our personal preference. This would be dift’erent fiom anyone else’s exact variant. so
the product variant would be completely customized to orr own individrul taste. But we
know that tiris is not the case for the products shown in Figure 6.2. Each has a limiteci
nutnber of variants. The customizatiort is lirnited. What limits the number of variants,
and the ailtount of customization’J The answer is sonie forr:r of internal scaie econom;/.
so that there is a cost advarrtage to prodLrcing larger anounts ola specific variani.
To understand rvhy \ve see so rluch intra-industry trade” we need a model of trade
driven by product dillbrentiation and scale econonies. ProdLlct ilifibrentiation is a
deviation from the assurnption of a homo-eeneous product, otle of the standard assump-
tions used in the analvsis of perfect competition” so we are entering the realm of imper-
fuct contpetition. Our analysis is based on a rnild fbrrn of imper’1bct competitian called
thc- product. The foreign varieties are iiot necessarill’ cheaper than the varieties pro-
duced by local ftrms. Rather, each loreign rrariet)’has dilleretrt characteristics. and
these buvers find the fbreign rrarieties’ charactedstics to be desirable. Ar rhe sanre
time, sonte fbreign buyers prefer varieties produced b-v firms in this coLtntr,v, and these
firms are able to expolt to the foreign country. Even if there are no relative cost ciifl-er-
ences of the tvpe ernphasized by theories of comparative advantage, there is interna-
tional trade. And, mucli of it can be intra-industry trade. rvith a counry exporting and
importing diflbrent variants of the same basic product.
extleme, each of-ns rvould u,anl to bu-v the riniclue product variant that exactly matches
our personal preference. This would be dift’erent fiom anyone else’s exact variant. so
the product variant would be completely customized to orr own individrul taste. But we
know that tiris is not the case for the products shown in Figure 6.2. Each has a limiteci
nutnber of variants. The customizatiort is lirnited. What limits the number of variants,
and the ailtount of customization’J The answer is sonie forr:r of internal scaie econom;/.
so that there is a cost advarrtage to prodLrcing larger anounts ola specific variani.
:.,i i: i.j ii Fli.l: t $ i? i { {_ i:} re ::} il’Ti ?’ + 4:.} ix,e. ili i}’r & & t} r
To understand rvhy \ve see so rluch intra-industry trade” we need a model of trade
driven by product dillbrentiation and scale econonies. ProdLlct ilifibrentiation is a
deviation from the assurnption of a homo-eeneous product, otle of the standard assump-
tions used in the analvsis of perfect competition” so we are entering the realm of imper-
fuct contpetition. Our analysis is based on a rnild fbrrn of imper’1bct competitian called
