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Chapter 20: Q. 14 (page 494)

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

Short Answer

Expert verified

The two main sources of economic gains from intra-industry trade are:

  1. Specialization
  2. Economies of Scale.

Step by step solution

01

Step 1. Meaning of intra-industry trade.

Intra-industry trade is an international trade of goods within the same industry and the products are both exported and imported by the country.

02

Step 2. Two main sources of economic gains

The two main sources of economic gains from intra-industry trade are:

  1. Specialization - Specialization in a particularly good leads increase in production as all the labor can be employed in the production of that good. It thus leads to the country manufacturing innumerable components of a single manufactured good.
  2. Economies of Scale - The scale of production expands, as the cost of production goes down. When the same goods of different firms are present in a market, the customer has greater choice leads to competition in the market which improves the quality of products as firms have to keep the market share.

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Most popular questions from this chapter

You just got a job in Washington, D.C. You move

into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?

Brazil can produce 100pounds of beef or 10autos. In contrast, the United States can produce 40pounds of beef or 30autos. Which country has the absolute advantage in beef? Which country has the absolute advantage in producing autos? What is the opportunity cost of producing one pound of beef in Brazil? What is the opportunity cost of producing one pound of beef in the United States?

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.

Do consumers benefit from intra-industry trade?

Consider two countries: South Korea and Taiwan.

Taiwan can produce one million mobile phones per day at the cost of \(10 per phone and South Korea can produce 50 million mobile phones at \)5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?
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