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Chapter 33: Q. 14. (page 804)

What are the two main sources of economic gains from intra-industry trade?

Short Answer

Expert verified

With the high degree of specialization and splitting up the value chain and from economies of scale, it resulted into the economic gains for the intra-industry trade.

Step by step solution

01

Step 1. Meaning of intra-industry trade.

It refers to the exchange of similar products belonging to the same industry. The term is usually applied to international trade, where the same types of goods or services are both imported and exported.

02

Step 2. Two main source of economic gains from intra-industry trade.

a) The learning that comes from a high degree of specialization and splitting up the value chain.

b) Economies of scale that leads to increased output and average lower costs.

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Most popular questions from this chapter

Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain.

If trade increases world GDP by 1% per year, what is the global impact of this increase over 10 years? How does this increase compare to the annual GDP of a country like Sri Lanka? Discuss. Hint: To answer this question, here are steps you may want to consider. Go to the World Development Indicators (online) published by the World Bank. Find the current level of World GDP in constant international dollars. Also, find the GDP of Sri Lanka in constant international dollars. Once you have these two numbers, compute the amount the additional increase in global incomes due to trade and compare that number to Sri Lanka’s GDP.

In Germany, it takes three workers to make one television and four workers to make one video camera. In Poland, it takes six workers to make one television and workers to make one video camera.

(a) Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell?

(b) Calculate the opportunity cost of producing one additional television set in Germany and in Poland. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of televisions?

(c) Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras?

(d) In this example, is the absolute advantage the same as comparative advantage, or not?

(e) In what product should Germany specialize? In what product should Poland specialize?

Why might intra-industry trade seem surprising from the point of view of comparative advantage?

Do consumers benefit from intra-industry trade
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