Chapter 6: Scale Economies,
Imperfect Competition, and Trade
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
6.1 Introduction
Chapter Objective:
To learn and understand the
major developments in trade
theories after the second World
War.
6-2
 Contents





Intra-Industry Trade
Economies of Scale
Product Differentiation
Overlapping Demand
Product Cycle
6-3
6.2 Intra-Industry Trade
产业内贸易

Definition
Intra-Industry Trade
VS
Inter-Industry Trade
6-4
 Measurement
Intra-Industry Trade Index
IITX = 1 -
ExportsX - ImportsX
ExportsX + ImportsX
0 < IITX< 1
6-5
IIT as a Percentage of Trade
in Nonfood Manufactured Goods
Country
1989
2005
United States
55.3
58.3
Canada
54.3
63.2
Japan
27.8
41.2
Germany
62.6
67.5
France
71.3
73.9
United Kingdom
69.0
71.7
6-6
6.3 Trade with
Economies of Scale
 Internal Economies of Scale
 External Economies of Scale
6-7
Internal vs. External
Economies of Scale
Firm’s
ACX
Firm’s
ACX
ACX
ACX
O
Firm’s Output
of X
(a) Internal
O
Industry Output
of X
(b) External
6-8
 Internal Economies of Scale
 Monopolistic Competition
垄断竞争
Modest Scale Economies
 Oligopoly
寡头垄断
Substantial Scale Economies
6-9
 Monopolistic Competition
and Trade
 Firm’s Production
Decision without Trade
封闭条件下厂商的生产决策
6-10
Figure 6.4
Price and Cost per unit
(Millions of yen per car)
The Monopoly Element in
Monopolistic Competition
3.1
Demand (D0)
1.5
Average Cost
Marginal Cost
6
Quantity
MR0 (Millions of cars per year)
6-11
Figure 6.5
The Competition Element in
Monopolistic Competition
Demand (D0)
6-12
 Firm’s Production
Decision Under Free Trade
开放贸易条件下厂商的生产决策
6-13
Figure 6.6
The Same Monopolistic
Competitor after Opening
Trade
6-14
 Trade and Market Equilibrium
自由贸易条件下的市场均衡
6-15
Figure 6.7
The Automobile Market with No
Trade and with Free Trade
6-16
 Basis for Trade

Product Differentiation
产品差异

Scale Economies
规模经济
6-17
 Gains from Trade

More Varieties

Lower Prices
6-18
 Welfare effects
Little impact on income
distribution between different
factor owners.

Gains from greater variety can
offset losses in factor income
resulting from inter-industry
shifts in production.

6-19

Oligopoly and International
Trade
 Oligopoly 寡头
Duopoly 双寡头
Large Civil Aircraft Market
 Boeing
 Airbus
6-20
 Oligopoly and Trade Pattern
Production is concentrated in
a few countries, which are net
exporters, and other countries
are importers.
6-21
 What is behind this pattern ?

Comparative Advantage

Economies of Scale
6-22
 Can this pattern be changed ?
Not easily.
 Scale Economies
 New entrants may suffer
losses for price reductions
and competition from old
firms.
6-23
 Oligopoly and Gains from Trade
 Oligopoly pricing
 National support for highprofit oligopoly firms
6-24
 External Economies of Scale
Industrial Agglomeration
产业集聚
 Silicon Valley
 Hollywood
 Wall Street
6-25
(Short-run)
(Long-run)
46
6-26
 Welfare effects
Producers in the exporting country
tend to gain producer surplus despite
of decline in price.

Producers in the importing country
lose producer surplus.

Consumers in both countries gain
consumer surplus.

6-27
 Trade pattern
Similar to trade with substantial
internal economies of scale.
Determination of locations
• Size of domestic market
• Historical luck
• Government push
6-28
6.4 Technology-Based Theories of
Trade: The Product Cycle
Raymond Vernon 1966
雷蒙德·弗农 (1913-1999)
Harvard University
6-29
Product Cycle
 New product
Mature product
Standardized product
 Introduction
Maturity
Growth
Decline
6-30
Innovating
Country
Developed
Countries
Export
O
Import
t1
t2 t3
t4
t5
t
Developing
Countries
6-31
6.5 Overlapping Demands
as a Basis for Trade
Staffan B. Linder
1961
林德
6-32
Product
Quality
QAmax
QAmim
O
IAmim
IAmax
Income
6-33
Product
Quality
QBmax
QAmax
Trade
QBmim
QAmim
O
Income
Overlap
IAmim IBmim
IAmax IBmax Income
6-34
SUMMARY
 Intra-Industry Trade
 Economies of Scale
 Product Cycle Hypothesis
 Overlapping-Demand Hypothesis
6-35
6-36
6-37
6-38
6-39
6-40
6-41
6-42
6-43
6-44
6-45