Why might intra-industry trade seem surprising

from the point of view of comparative advantage?

Short Answer

Expert verified

Intra-industry trade may seem surprising from the point of view of comparative advantage because they are importing the same good they are exporting. In theory with the comparative advantage, they would not need to import.

Step by step solution

01

Step 1. Definition

Intra-industry trade is the exchange of alike products belonging to the same industry.

Comparative advantage is the ability to produce a good or service at a relatively lower opportunity cost than others.

02

Step 2. Explanation

In the comparative advantage principle, the nations which trade with each other for gains should be differently skilled but in Intra-industry trade, the trade occurred between the countries that have identical types of resources.
According to comparative advantage, it wouldn't make sense for a country to import a good it exporting, however, because of competition, diversity of products, and quality preferences, intra-industry trade occurs.
Example: Many countries manufacture cars, so why would countries that are efficient car makers import cars from other countries? To have a higher diversity of products and qualities.
Comparative advantage works in a one-dimensional scenario, where exchanged goods are identical.

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Most popular questions from this chapter

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.

Why does the United States not have an absolute

advantage in coffee?

Does intra-industry trade contradict the theory of

comparative advantage?

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.

How does comparative advantage lead to gains

from trade?

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