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Chapter 19: Q 14. (page 462)

What are the two main sources of economic gains

from intra-industry trade?

Short Answer

Expert verified

Specialization and economies of scale.

Step by step solution

01

Step 1. Definition

Exchnage of similar products belonging to the same industry is known as intra-industry trade. In other words, imports and exports of same type of products.

02

Step 2. Explanation

There are two main sources of economic gains from Intra industry trade:

1. specialization

2. economies of scale

Firms also benefits by splitting up the value chain and operating different stages of production in different countries of the world at a lower cost.

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Most popular questions from this chapter

In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell?

Review the numbers for Canada and Venezuela from Table 19.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.

a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.

b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are

willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this “ask” as the relative price or trade price of lumber.

c. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

Are the gains from international trade more likely

to be relatively more important to large or small

countries?

In Exercise 19.31, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada?

Can a nation’s comparative advantage change over

time? What factors would make it change?
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