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Chapter 20: Q 23. (page 494)

Does intra-industry trade contradict the theory of

comparative advantage?

Short Answer

Expert verified

This is not right that intra-industry trade contradicts the theory of comparative advantage.

Step by step solution

01

Step 1. Definition

Comparative advantage is defined as the capability of an economy to produce a good or service at a reduced opportunity cost as compared to its trading partners.

Intra-industry trade is defined as the situation where countries interchange or exchange alike products which relate to the same industry.

02

Step 2. Explanation

No, this is not true. Intra-industry trade does not contradict the theory of comparative advantage. Trade in similar kind of products help in broadening the concept of comparative advantage through higher specialization and economies of scale acheived from splitting the value chain.

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Most popular questions from this chapter

What is intra-industry trade?

Why might intra-industry trade seem surprising

from the point of view of comparative advantage?

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 12workers 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?

What is the absolute advantage? What is comparative advantage?

Look at Table 20.9. Is there a range of trades for

which there will be no gains?
See all solutions

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