intraindustry versus interindustry trade

8/13/2019 Intraindustry Versus Interindustry Trade

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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 Hoogenous 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 ,aret Table 4.4

VII. The $e#fare I!#ications of Intraindustry Trade

Figure 4.

TEACHIN% NOTE& AND TIP&

I. Introduction

3


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3 -&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#auses7international 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 *essybusiness #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

III. Defining Intraindustry Trade

Notes

=ou don


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Intraindustry Trade 33

V. E"!#anations of Intraindustry Trade in Hoogeneous 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 indi%%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"ea %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&erest 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!er5t&e t&ree are not se"arate boxes and t&ey o!erla" a good bit. T&e (OS exa*"le is also ano!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 *arets 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 *aing *arets *ore #o*"etiti!e t&an t&eyot&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!

As t&e students +&at +ould &a""en to t&eir +el%are i% t&e U.S. banned i*"orts o% any "rodu#tt&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!antagein t&at "rodu#t and don


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3D -&a"ter 4

2. Intraindustry trade is *easured by t&e intraindustry trade index. T&is index indi#ates t&ea*ount o% intraindustry trade e*bodied in a #ountry 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 denotet&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 1@@5@@@ o% #lot& %ro* India5 t&e se#ond ter* in t&eex"ression redu#es to 1 by di!iding 91@@5@@@G1@@5@@@5 and t&e +&ole ex"ressione)uals @. T&is indi#ates no intraindustry trade in t&e #lot& industry. I% t&e U.S. onlyex"orts 1@@5@@@ o% *a#&ines to India5 t&e se#ond ter* in t&e ex"ression redu#es to 1 bydi!iding 91@@5@@@G1@@5@@@5 and t&e +&ole ex"ression e)uals @. T&is indi#ates nointraindustry trade in *a#&ines. I% t&e U.S. ex"orts @5@@@ in %ood to India and i*"orts@5@@@ in %ood %ro* India5 t&e se#ond ter* in t&e ex"ression redu#es to @ by di!iding9@G1@@5@@@5 and t&e +&ole ex"ression e)uals 15 indi#ating t&at 1@@ "er#ent o% t&e tradein 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 #losert&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&esa*e good or ser!i#e.

. T&e #o*"uted intraindustry trade index is .3.

. Intraindustry trade in &o*ogeneous goods bet+een #ountries #an o##ur under %our"ossible #ir#u*stan#es. First5 an identi#al and buly *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*ogeneousser!i#es also #an be t&e basis o% intraindustry trade due to t&e 8oint "rodu#tion o% t&eser!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 orde*and #an lead to intraindustry trade in &o*ogeneous goods.

3. Cori'ontally di%%erentiated goods are goods t&at are "er#ei!ed to be di%%erent in so*eslig&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#esand "&ysi#al #&ara#teristi#s o% ne+ auto*obiles !ary enor*ously.


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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 no+n as de#reasing #osts or in#reasing returns to s#ale.S#ale e#ono*ies are internal +&en t&e %ir*


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D@ -&a"ter 4

#onsu*ers. T&e *ost "ro*ising %oreign *arets %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*aret5 but "art o% t&e out"ut +ill be ex"orted to ot&er #ountries +&ere t&ere is are#e"ti!e *aret.

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 asintraindustry 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&erde!elo"ing #ountries at a si*ilar le!el o% in#o*e. Co+e!er5 it &as been obser!ed t&att&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 lining !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&edo*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$)uality !ersions o%t&e "rodu#ts %ro* de!elo"ed #ountries. T&e re!erse is true %or de!elo"ed #ountries. Int&ese #ountries t&ere *ay be less a%%luent #onsu*ers +&o desire #&ea"er !arieties o% a"rodu#t t&at are not "ro%itable to "rodu#e do*esti#ally be#ause t&e *aret is too s*all.T&e solution *ay be to i*"ort lo+er$"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 ando!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"edand de!elo"ing #ountries.

14. 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&outJa"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.

*ULTIPLE,CHOICE +UE&TION&

1. Intraindustry trade:K 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.K d. all o% t&e abo!e


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Intraindustry Trade D1

2. 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.

K d. intraindustry trade.

. Intraindustry trade:K a. #an be ex"lained in t&e sa*e +ay +e ex"lain trade in +&eat or textiles.

b. #annot &a""en i% t&e "rodu#ts in )uestion are di%%erentiated.#. #annot o##ur i% t&e *aret is #&ara#teri'ed by *ono"olisti# #o*"etition.d. all o% t&e abo!e

4. 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.

K 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.K 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%:K a. intraindustry trade.

b. interindustry trade.

#. t&e %a#tor$"ro"ortions t&eory.d. t&e /eontie% "aradox.

3. ;&en t&ere is balan#ed 9ex"orts e)ual i*"orts intraindustry trade in a #ertain "rodu#t5t&e index o% intraindustry trade is:a. @.@@.b. @.2.#. @.@.

K d. 1.@@.

D. I% in 2@@25 U.S. auto*obile ex"orts +ere 1@@ billion and i*"orts +ere @@ billion5 t&e

index o% intraindustry trade +ould be:a. @.2.b. @.3.

K #. @[email protected]. 1.@@.


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D2 -&a"ter 4

E. 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.

K #. t&e trade is t+o$+ay trade.d. t&e "rodu#ts are not #ounted as ex"orts or i*"orts.

1@. T&e intraindustry trade index:K 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.

11. 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. @[email protected]. 1.@.

K #. @.3.

d. @.1.

12. -ountry A i*"orts @ in s&irts and ex"orts 4@ in s&irts. Its intraindustry trade index%or s&irts is:

K a. .D.b. .2.#. [email protected]. E@.

1. -ountry A i*"orts @ in s&irts and ex"orts @ in s&irts. Its intraindustry trade index%or s&irts is:

a. @.K b. 1.#. [email protected]. 1@@.

14. 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 ,

K d. 1 $ N> $ ,NG9> M ,

1. Intraindustry trade is *ost #o**on in:a. /atin A*eri#a.b. de!elo"ing #ountries.

K #. de!elo"ed #ountries o% (uro"e.d. all #ountries.


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Intraindustry Trade D

1. Intraindustry trade in &o*ogeneous "rodu#ts o##urs be#ause:a. %oreign "rodu#ts are *ore ex"ensi!e.b. tari%%s *ae do*esti# good a%%ordable.

K #. seasonal %lu#tuations.d. lo+er do*esti# #o**uni#ation #osts.

13. ;&i#& o% %ollo+ing is not a reason %or intraindustry trade in &o*ogeneous "rodu#tsBa. Identi#al and buly *aterialsb. Joint "rodu#tion o% #ertain inds o% ser!i#es#. (ntre"ot trade

K d. Produ#t di%%erentiation

1D. ;&i#& o% t&e %ollo+ing is not an ex"lanation o% intraindustry trade in &o*ogeneous"rodu#tsBa. 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*andK d. /a# o% resour#es to *ae a "rodu#t do*esti#ally

1E. ;&i#& o% t&e %ollo+ing is not a reason %or IIT in &o*ogeneous "rodu#tsBa. order tradeb. Seasonal trade#. Trade in &o*ogeneous ser!i#es

K d. Produ#t di%%erentiation

2@. Cori'ontally di%%erentiated "rodu#ts are "rodu#ts +&ere:K 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.

21. 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.

K 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.

22. ;&i#& o% t&e %ollo+ing #&ara#teri'es *ono"olisti# #o*"etitionBa. Pri#e #ollusionb. Pri#e dis#ri*ination

K #. Produ#t di%%erentiationb. Pri#e #ontrols


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D4 -&a"ter 4

2. ;&i#& o% t&e %ollo+ing *aret stru#tures is i*"er%e#tly #o*"etiti!eBa. ,ono"olyb. Oligo"oly#. ,ono"olisti# #o*"etition

K d. All o% t&e abo!e

24. Intraindustry trade:K 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.

2. Fir*s in i*"er%e#tly #o*"etiti!e *arets:a. are not able to in%luen#e t&e "ri#e o% t&e "rodu#t.

K b. #an in%luen#e t&e "ri#e o% t&e "rodu#t by #&anging t&e )uantity o%%ered %orsale.

#. 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.

2. T&e essential #&ara#teristi# o% a #o*"etiti!e %ir* is t&at:a. it is a "ri#e *aer.

K b. it is a "ri#e taer.#. t&e *aret de*and %or t&e "rodu#t does not exist.d. %ir*s "rodu#e di%%erentiated "rodu#ts.

23. A #o*"etiti!e %ir* is one:a. t&at &as a large ad!ertising budget.b. t&at &as *ono"oly "o+er.

K #. t&at &as no e%%e#t on t&e *aret "ri#e.d. t&at #an raise "ri#es to in#rease "ro%its.

2D. A *ono"olist &as *aret "o+er be#ause:a. it is a "ri#e *aer.b. it "rodu#es a uni)ue "rodu#t.#. it &as t&e ability to alter t&e *aret "ri#e o% t&e "rodu#t.

K d. all o% t&e abo!e

2E. In +&i#& o% t&e %ollo+ing *aret stru#tures is t&ere only one %ir*Ba. ,ono"olisti# #o*"etition

b. Oligo"olyK #. ,ono"olyd. Per%e#t #o*"etition


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Intraindustry Trade D

@. ;&i#& *aret stru#ture is #&ara#teri'ed by only a %e+ %ir*sBa. ,ono"olisti# #o*"etition

K b. Oligo"oly#. ,ono"olyd. Per%e#t #o*"etition

1. ;&i#& o% t&e %ollo+ing %a#tors #ould "otentially #ause intraindustry tradeBa. T&e existen#e o% signi%i#ant e#ono*ies o% s#aleb. R0 being an i*"ortant in"ut into t&e "rodu#tion "ro#ess#. T&e o"eration o% t&e suns"ot #y#le

K d. ot& A and

2. ;&i#& o% t&e %ollo+ing is one o% t&e *ost i*"ortant deter*inants o% intraindustry tradeBa. P&ysi#al #a"italb. Cu*an #a"ital#. Unsilled labor

K d. (#ono*ies o% s#ale

. (#ono*ies o% s#ale:a. are no+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*


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D -&a"ter 4

3. A de#line in a!erage #osts #aused by t&e ex"ansion o% an industry is a %or* o%:K 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.

D. 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 *aret *ay be *ore liely 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.

K d. ot& a and b

E. T&e "rodu#t #y#le re%ers to:K 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 *areting 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.

4@. T&e basi# idea t&at #ertain #ountries s"e#iali'e in "rodu#ing ne+ "rodu#ts based onte#&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 *arets.

K #. "rodu#t #y#le.d. "rodu#tion #ost t&eory.

41. ;&i#& o% t&e %ollo+ing "rodu#ts +ould t&e "rodu#t #y#le least liely be a""lied toBa. THsb. -al#ulators#. H-Rs

K d. -rude oil

42. A##ording to t&e "rodu#t #y#le *odel5 #o*"arati!e ad!antage:K 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.

4. ;&i#& o% t&e %ollo+ing "rodu#ts +ould t&e "rodu#t #y#le *ost liely be a""lied toBK a. -o*"uters

b. -o%%ee#. -rude oild. Seasonal %ruits


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Intraindustry Trade D3

44. T&e "rodu#t #y#le %ollo+s +&i#& o% t&e %ollo+ing "rodu#tion strategiesBK a. &ig&$in#o*e do*esti# *aret5 &ig&$in#o*e non$do*esti# *aret5 de!elo"ing

#ountry *aretb. de!elo"ing #ountry *aret5 *oderate$in#o*e *aret5 &ig&$in#o*e

do*esti# *aret#. &ig&$in#o*e do*esti# *aret5 *oderate$in#o*e *aret5 de!elo"ing #ountry

*aretd. &ig&$in#o*e do*esti# *aret5 de!elo"ing #ountry *aret

4. A &ig&$in#o*e #ountry is *ore liely to trade +it&:a. underde!elo"ed #ountries.

K b. &ig&$in#o*e #ountries.#. &ig& "o"ulation #ountries.d. de!elo"ing #ountries.

4. 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.#. R0 %or &ig&$"ri#ed !ersions o% goods +ould be done in lo+$in#o*e #ountries

+&ere labor is #&ea"er.K d. T&e #ountry +ould tend to i*"ort lo+$"ri#ed !ersions and ex"ort &ig&$

"ri#ed !ersions o% goods.

43. 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.

K d. #an be related to t&e existen#e o% o!erla""ing de*ands.

4D. ;&i#& o% t&e %ollo+ing &as not been no+n to lead to intraindustry tradeBa. O!erla""ing de*andsb. (OS#. Herti#al "rodu#t di%%erentiation

K d. Trans%er "ri#ing

4E. 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 liely to trade +it& #ountries +it& a&ig& a!erage in#o*e.#. #ountries are liely to trade +it& ot&er #ountries t&at &a!e si*ilar in#o*e

le!els.K d. bot& a and #


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DD -&a"ter 4

@. /inder


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Intraindustry Trade DE

. F T&e %a#tor$"ro"ortions t&eory ade)uately ex"lains +&y #ountries engage in intraindustrytrade.

4. T Intraindustry trade is t&e situation +&ere a #ountry is bot& i*"orting and ex"orting in t&esa*e industry.

. F T&e ex#&ange o% auto*obiles bet+een de!elo"ed #ountries is an exa*"le o% interindustrytrade.

. F T&e %a#t t&at t&e U.S. bot& i*"orts te)uila %ro* ,exi#o and ex"orts bourbon to ,exi#ois an exa*"le o% interindustry trade.

3. F Interindustry trade is t&e situation +&ere a #ountry is bot& i*"orting and ex"orting t&esa*e "rodu#t.

D. F T&e intraindustry trade index #an ne!er be 'ero.

E. F 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&att&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*egood.

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% t&e trade is interindustry trade.

1. F I% t&e IIT index %or a "rodu#t #ategory is .E t&en t&ere is !ery little intraindustry tradeo##urring in t&is "rodu#t #ategory.

1. 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 laterex"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 ingoods +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.


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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#tdi%%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#tdi%%erentiation.

2. F Herti#al "rodu#t di%%erentiation only o##urs in &o*ogeneous "rodu#ts.

2. 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&enu*ber o% indi!idual %ir*s in t&e *aret"la#e.

2D. T Cori'ontally di%%erentiated goods are goods +&ere t&e "ri#es are si*ilar but t&e goodsdi%%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* a!erage #osts rise as out"ut o% t&eindustry 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 itse#ono*i# li%e in t&e #ountry t&at introdu#es t&e "rodu#tion o% t&e "rodu#t.

. F T&e "rodu#t #y#le is ex"lanation %or interindustry trade be#ause as t&e "rodu#t *o!est&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.

. T ;it& t&e "rodu#t #y#le *odel5 #o*"arati!e ad!antage *ay *o!e %ro* one #ountry toanot&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.


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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 #ountriest&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& !erydi%%erent "er #a"ita in#o*es.

42. F O!erla""ing de*ands &as not&ing to do +it& IIT.

4. T /inder


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E2 -&a"ter 4

3. ;&at is t&e "rodu#t #y#leB Co+ is it related to intraindustry tradeB

D. Use t&e /inder &y"ot&esis to ex"lain t&e %a#t t&at t&e U.S. si*ultaneously i*"orts andex"orts auto*obiles.

E. ;&y +ould intraindustry trade o##ur bet+een de!elo"ed and de!elo"ing #ountriesB

1@. 0is#uss t&e reasons +&y #ountries *ay engage in intraindustry trade.

11. /ist and ex"lain t&e +el%are e%%e#ts o% intraindustry trade.

(RIE) AN&$ER& TO &HORT AN&$ER E&&A-

1. Interindustry trade is #ountries trading di%%erent goods +it& one anot&er. For exa*"le5t&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 !erydi%%erent goods. Intraindustry trade #onsists o% a #ountry ex"orting and i*"orting t&esa*e good. For exa*"le5 t&e U.S. i*"orts and ex"orts auto*obiles5 beer5 and steel.

2. T&e #al#ulated intraindustry trade index is @.DD. T&is indi#ates t&at t&e *a8ority o% tradein 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


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Intraindustry Trade E

. ,ost intraindustry trade is trade in di%%erentiated goods bet+een #ountries. 0i%%erentiatedgoods &a!e %eatures t&at *ae t&e* a""ear di%%erent %ro* #o*"eting goods in t&e sa*e*aret or industry. In addition5 *ost international trade in di%%erentiated goods o##ursunder #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 *aret"la#e. Under"er%e#t #o*"etition5 a %ir* #annot a%%e#t t&e *aret "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 ableto 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 *aret #an in%luen#e t&e "ri#e o% t&e "rodu#t5t&is *eans t&at t&e %ir* &as so*e degree o% *aret "o+er. I*"er%e#t #o*"etition #ano##ur under t&ree di%%erent *aret 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 isa result o% e#ono*ies o% s#ale. (#ono*ies o% s#ale *eans t&at as t&e "rodu#tion o% agood 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$si'e #ars and sub#o*"a#t #ars under identi#al #ost #onditions sot&at t&ey &a!e t&e sa*e long$run a!erage #ost #ur!es 9A-. e#ause #ost and "ri#estru#tures are t&e sa*e5 t&ere is no basis %or trade. ?o+5 assu*e t&at bot& Qer*any andt&e U.S. allo+ %ree trade in t&e auto*obile *aret. T&e total de*and %or %ull$si'e andsub#o*"a#t #ars in t&e #o*bined Qer*an and U.S. *arets is no+ larger5 and t&is#o*bined larger de*and %or %ull$si'e #ars and sub#o*"a#t #ars +ould allo+ t&e U.S.%ir* to "rodu#e *ore %ull$si'e #ars and tae ad!antage o% t&e e#ono*ies o% s#ale. T&eQer*an %ir* no+ "rodu#es *ore sub#o*"a#t #ars and +ould tae ad!antage o%e#ono*ies o% s#ale. ;it& %ree trade5 t&e U.S. +ould ex"ort %ull$si'e #ars to Qer*any5and 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.

3. 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 +&ileot&er #ountries5 *ostly de!elo"ing #ountries5 s"e#iali'e in "rodu#ing already +ell$establis&ed goods. T&e t&eory o% t&e "rodu#t #y#le is t&at as a good *o!es t&roug& its"rodu#t #y#le5 t&ere +ill be #&anges bot& in t&e geogra"&i#al lo#ation o% "rodu#tion and&o+ t&e good is "rodu#ed. In t&e %irst stage o% t&e "rodu#t #y#le5 *anu%a#turers o% a6ne+7 "rodu#t need to be near a &ig&$in#o*e *aret5 +&ere t&ey #an re#ei!e #onsu*er%eedba# on t&e "rodu#t. Aside %ro* ser!ing t&e do*esti# *aret5 t&e %ir* +ill begin toex"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 inter*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&$in#o*e *arets rat&er t&an ex"ort it%ro* t&e do*esti# #ountry. In so*e #ir#u*stan#es5 t&e do*esti# #ountry5 +&ere t&e"rodu#t +as originally de!elo"ed5 *ay begin i*"orting t&e "rodu#t %ro* ot&er &ig&$in#o*e #ountries +&ere "rodu#tion #osts are less. In t&e t&ird stage o% t&e "rodu#t #y#le5t&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


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E4 -&a"ter 4

standardi'ed "rodu#tion "ro#esses #an be *o!ed to de!elo"ing #ountries +&ere usingse*isilled labor in asse*bly$ty"e o"erations ee"s "rodu#tion #osts lo+. T&einno!ating #ountry no+ be#o*es an i*"orter o% t&e "rodu#t. In t&e inno!ating #ountry5attention *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 inindustriali'ed #ountries5 intraindustry trade o##urs a*ong &ig&$in#o*e #ountries as t&eyex#&ange t&ese ne+ "rodu#ts +it& one anot&er. T&e *odel also i*"lies t&at &ig&$in#o*e#ountries +ill be ex"orting 6ne+er7 !ersions o% t&e "rodu#t to de!elo"ing #ountries andi*"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 lielyto 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% agood %or +&i#& t&ere is a large &o*e *aret. In t&is #ase5 a #ountry


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Intraindustry Trade E

&ig&er$)uality !ersions o% t&e "rodu#t %ro* de!elo"ed #ountries. T&e re!erse is true %orde!elo"ed #ountries. In t&ese #ountries t&ere *ay be less a%%luent #onsu*ers +&o desire#&ea"er !arieties o% a "rodu#t t&at are not "ro%itable to "rodu#e do*esti#ally be#ause t&e*aret is too s*all. T&e solution *ay be to i*"ort lo+er$"ri#ed !ersions o% t&e "rodu#tdesigned %or #onsu*ers in lo+$in#o*e #ountries. T&e existen#e o% !erti#al "rodu#tdi%%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 tradebet+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& intraindustrytrade 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 gainsunder 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.

11. 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 ast&e traded goods are "ro!ided based on lo+er o""ortunity #osts in t&e %or* o% lo+ertrans"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##urbut 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 *arets. In t&ese *arets5 t&e "ri#e isgreater t&an t&e *arginal #ost o% "rodu#ing t&e last unit o% out"ut. Furt&er5i*"er%e#tly #o*"etiti!e %ir*s are #&ara#teri'ed by ex#ess #a"a#ity5 +&i#& *eanst&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*aret 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%areo% a #ountry to t&e extent t&at do*esti# #onsu*ers &a!e *ore ty"es o% t&e "rodu#ta!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 *aes it "ossible %or #o*"anies to "rodu#e at &ig&erle!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 *aret but also in t&e do*esti#*aret.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.

intraindustry versus interindustry trade

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