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Chapter 33: Q.25 (page 804)

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

Short Answer

Expert verified

Because similar products are traded.

Step by step solution

01

Step 1. Introduction 

Intra-industry trade refers to the trade of similar types of products between different countries. Comparative advantage refers to the ability to produce a product at a lower opportunity cost.

02

Step 2. Explanation 

Comparative advantage helps in explaining the general patterns of trade such as how low-productivity regions are able to export to high productivity regions. Theoretically, comparative advantage suggests that trade should take place between countries with high differences in opportunity cost.

However, in practice, a large portion of international trade takes place between similar advanced economies. So, from the perspective of the comparative advantage, this might be surprising.

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