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Chapter 19: Q5 (page 461)

How can there be any economic gains for a country from both importing and exporting the same good, like cars?

Short Answer

Expert verified

There can be economic gains for intra industry trade, based on specialisation & economies of scale, as per Krugman Model.

Step by step solution

01

Intra Industry Trade Definition

It refers to international trade of goods from the same industry.

Eg : Many developed rich countries both produce & export autos, and also import autos.

02

Economic Gain concept

Economic Gain is the gain in efficiency & social product, utility.

Intra Industry trade leads to economic gains in countries with similar economic welfare levels, in following ways as explained by Krugman New Trade Theory

  • Division and specialisation of labor : because labor is deeply imbibed in diligent small portions of work processes, related to production of a well defined good.
  • Economies of Scale : because a brand's standardised production is likely to be concentrated at one location with huge quantities' production.

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Most popular questions from this chapter

What factors does Paul Krugman identify that

supported expanding international trade in the 1800s?

Why might intra-industry trade seem surprising

from the point of view of comparative advantage?

What is intra-industry trade?

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.

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?
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