Session 6
Alternative Theories of Trade
(Scale Economies, Imperfect Competition, and Trade)
Trade Facts in Search of Better Theory
According to the “comparative advantage”, nations
should trade with each others to exploit their
production-side differences.
Land-intensive
country
Labor-intensive
country
Export
Export
Developed
Countries
Trade
Different Resources
Developing
Countries
The Rise of Intra-industry Trade
Developed
Countries
Germany
Trade
Similar Resources
Developed
Countries
Japan
Trade
Why do they still have to trade ?
Percentage of Intra-industry Trade for
Non-food Manufactured Goods
Rationales for Intra-industry Trade
1.Demand Effect
Product Differentiation
Consumers view the products of an industry
as close but not perfect substitutes for each other.
2.Supply Effect
Economies of Scale
Economies of scale pulls down the price, which
the create competitive advantage for an industry.
Product Differentiation VS Scale Economies
Economies of Scale
1. Internal Economies Scale
1. External Economies Scale
Global Industries Dominated
by a Few Large Firms
Airbus
Microsoft
Boeing
Nintendo
Sony
Monopolistic Competition and Trade
Monopolistic is somewhat like “monopoly”
and somewhat like “competition”.
Some scale economies exist that are internal to the firm,
but they are moderate.
Germany
Japan
Profit
D (0)
AC
MC
MR
Still
No trade
Internal Scale Economies and Trade
Unit Cost
(No trade)
Cost Decrease
Unit Cost
(Free trade)
Price
External Scale Economies and Trade
D1
D2
S1 (Not include external economies)
S2 (Include external economies)
Industry’s average cost,
including external economies)