FREC 410
International Ag. Trade & Marketing
Imperfect Competition
and
International Trade
(Read Assigned Chapters in Pugel Txt)
Dr. Titus Awokuse
http://www.udel.edu/FREC/Awokuse/FREC410_webpage.htm
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Economies of Scale & Int’l Trade
Review of Classical Trade Model
Another major basis for int’l trade is:
We have studied TWO classical trade models:
Ricardian model
H-O model
„ Source of comparative advantage differ:
Labor productivity (Ricardian model)
Factor endowments (H-O model)
Economies of Scale (EoS)
… also called Increasing Return to Scale (IRTS)
„
Differences b/w countries need not exist for trade to be
mutually beneficial
„
Identical nations (tech., endowments, preferences) can
still gain from trade
Example:
trade among industrialized countries is
explained by EoS models
Under
classical theory of trade (Ricardian, H-O),
these _______________________________
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Economies of Scale & Returns to Scale
Economies of Scale & Int’l Trade
Question: What is the relationship b/w EoS and RTS?
Definition:
EoS in production exists if increasing expenditures on all
inputs (with input prices constant) increase output quantity
by a larger percentage so that the __________________
of producing each unit of output declines.
Assume production function: Y=f(K,L)
„
True
„
Example:
EoS exist if the doubling all input amounts (K,L) cause
Constant RTS if:
f(tK,tL) = tf(K,L) for all t > 1
„
output to ______________________
for perfect competitive firms
Increasing RTS if :
f(tK,tL) > tf(K,L) for all t > 1
Two depictions of IRTS: (see graphs)
increasing productivity as production scale rises
Decreasing __________ as production scale rises
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Economies of Scale & Returns to Scale
Two Kinds of Economies of Scale
Hypothetical Example: Cheese Industry
Relationship b/w Input to Output
Output
Avg. Labor Input
5
Total Labor
Input
10
10
15
1.50
15
20
1.33
20
25
1.25
25
30
1.20
30
35
1.17
„
Internal EoS:
if the expansion of the firm itself is the basis for the
decline in its _________________
2.00
„
External EoS:
if
avg. cost decline depends on the size of the
whole industry within a specific geographical area
e.g. Silicon Valley
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Two Kinds of Economies of Scale
„
Economies of Scale: Implications
„
Geographical industry concentration leads to:
External EoS: e.g. Silicon Valley
Many
small firms
„ no cost advantage to larger firms
Implies perfectly competitive firms
„
Specialized suppliers - better input mkts
„
Labor mkt pooling of potential workers
„
Knowledge spillover via worker interactions
„
Internal EoS:
Large
firms
„ have cost advantages over small firms
Imperfect competition
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Economies of Scale & Market Structures
„
Perfect competition
„
Monopolistic competition
„
Oligopoly
„
Monopoly
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Monopolistic Competition Models
Model Main Features:
„
Cross perfect competition and monopoly
„
Allows for IRTS in production
„
Allows for _______________ products
Application:
„
Analysis of intra-industry trade
Explains
why some nations X and M
automobiles simultaneously
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Monopolistic Competition Models
Monopolistic Competition & Trade
Model Assumptions:
„
„
„
Similar to PC:
Less
Many
firms
There
is free entry and exit
Each
variety of products available to consumers
Smaller
„
scale of production due to ______________
Constraints removed with trade:
Creation
of expanded world mkt bigger than any
individual national mkts
Similar to Monopoly:
There
Constraints in absence of trade:
are EoS in production
Availability
firm produce __________________
Larger
of greater variety of products
mkt lead to lower _____________________
differentiated
product are imperfectly
substitutable in consumption
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Monopolistic Competition & Trade
Monopolistic Competition & Trade
„
Trade without IRTS:
Nation A
(K- abundant)
Manufactures
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„
Food
Trade with IRTS:
Nation A
(K- abundant)
Manufactures
Food
INTERindustry
INTRAindustry
Nation B
(L- abundant)
Nation B
(L- abundant)
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Economies of Scale: Summary
Economies of Scale: Summary
„
„
If EoS exists WITHOUT int’l trade, there will be:
less variety of goods available to consumers
Smaller scale of production and market size
Only
_______________ trade exist
If EoS exists WITH int’l trade, there will be:
Gains from trade for nations similar in endowments
Each nation can specialize in the production of few
goods and simultaneously increase variety of available
goods
Opportunities for intra-industry trade exist
Larger scale of production and market size
Larger mkt leads to lower avg. consumer prices
Increase in total world production _________________
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Factor Mobility & Trade: Overview
Two forms of international economic relations
Factor Movements
& Int’l Trade
„
International trade in goods and services
„
International factor movements
Labor
migrations
Transfer
of capital (int’l lending & borrowing)
Linkages
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through ____________corporations
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Factor Mobility & Trade: Overview
„
„
Factor Mobility & Trade: Overview
Definition:
Factor movements refers to the ability to move
factors of production (K,L, etc) out of one
production process into another.
Classical trade models assume:
Factor
Factor movements can occur domestically
(within a country) or across countries:
Between
firms ________ an industry OR
__________
„
Mobile between firms within an industry
„
Mobile between industries within a country
„
Immobile between countries
How
industries
are (freely and costlessly),
realistic are these assumptions?
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Domestic Factor Mobility
International Factor Mobility: Labor
Different degrees of mobility arise because there are
Similar to international trade (causes and effects)
different adjustment costs associated with factors
„
________________
Example: Textile factory going out of business.
Textile
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„
firm employs a variety of factors:
„
Workers: 1) Accountant, 2) Seamstress
„
„
Capital equipments: 1) Loom, 2) GMC Truck
„
Land
does the cost of factor mobility vary across
these factors of production?
„
„
How
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Caused by the differences in resource
endowments
Labor moves from L-abundant nation to where
it’s scarce
It leads to convergence of wages across nations
It raises total world output
It generates strong _________________ effects
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International Factor Mobility: Capital
„
Int’l Factor Mobility: Multinational Firms
Capital flows in terms of financial transactions
U.S.
„
bank lends to a foreign firm
firms
U.S. residents buy stocks in a foreign firm
Inter-temporal
Multinational Enterprises(MNEs):
e.g.
trade:
that operate business units in multiple nations
Automobiles & Pharmaceutical companies
They
are vehicles of int’l ___________________
„
trade of present consumption for future consumption
„
E.g. Saudis invested much of extra oil revenue
Why
is a good produced im multiple locations?
abroad
Why
is production in different locations done by the
„
relative price is: One plus the real rate of interest
„
Two questions:
same firm rather than different firms?
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Int’l Factor Mobility: Multinational Firms
Why have MNEs?
„
Means of extending control abroad to take advantage of
differences in resource endowments
„
Transport costs and foreign trade barriers
„
Capturing returns to technology in other nations
„
Take advantage of vertical integration
some subsidiaries produce inputs for another
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