International Trade Notes

Scale Economies, Imperfect Competition, and Trade
Intra-Industry Trade for United States, ( 2012) –PUGEL FIG 6.2

U.S. Exports (X) $million U.S. Imports (M) ($millions) Total Trade (X+M) ($millions) Net Trade (X-M) ($millions) Intra-Industry Trade ($millions) IIT Shares (%)
1,723 1,962 3,684 (−)239 3,445 93.5

Perfumes(55310)
3,710 3,058 6,768 (+)651 6,117 90.4

Cosmetics(55320)
Clothes washing machines 205 308 512 (−)103 410 79.9

(77511)
33,483 27,490 60,973 (+)5,993 54,979 90.2

Microcircuits (77640)
53,901 149,142 203,042 (−)95,241 107,802 53.1

Automobiles(78120)
323 134 456 (+)189 267 58.6

Books and brochures (89219)
Photographic 2,414 1,712 4,126 (+)701 3,425 83.0

cameras(88111)
• Intra-industry trade is the difference between total trade and (the absolute value of) net trade.
• The IIT share is intra-industry trade as a percentage of total trade.
VT-01 2
Average Percentage Shares of Intra-
Industry Trade in the Country’s Total Trade
(Nonfood Manufactured Products) - Fig 6.3
Country 1989 2005 2012

United States 55.3 58.3 63.6
Canada 54.3 63.2 55.4
Japan 27.8 41.2 38
Germany 62.6 67.5 67.2
France 71.3 73.9 71.5
United Kingdom 69.0 71.7 71.6
For trade in non food manufactured goods (SITC 5 classification), intra-industry trade is more than half of overall trade for most
industrialized countries. The estimates are based on over 1300 different individual product categories.
The importance of IIT rose from 1989 to 2005 for these six countries. Post 2005, the importance of IIT has roughly plateaued (except for US)
3
VT-02
Scale Economies – Fig 6.1
VT-03 4
Monopolistic Competition and Trade
Monopolistic competition describes an industry with
the following characteristics:
• A large number of firms each producing a variant of a
product that consumers view as unique. The product
differentiation may be based on branding, physical
characteristics, quality, effectiveness, or anything else
that matters to consumers.
• Each firm has some degree of monopoly power based
on its established production of its unique variety.
• There is ease of entry and exit of firms in the long run
VT-03 5
Basis for Trade
• In this setting the basis for trade is product differentiation.
• The basis for exporting is the domestic production of unique
models for foreign consumers
• The basis for importing is the demand by domestic consumers
for unique models produced by foreign firms.
• Intra-industry trade in differentiated products can be large,
even between countries that are similar in their general
production structure
6
The U.S. Market for Compact Cars –Fig 6.4
The key characteristics of monopolistically
competitive market for cars with no trade in
the U.S. are:
Product Differentiation - The price curve
(P) is downward sloping
Internal scale economies – The unit cost
curve (UC) is upward sloping
Ease of entry and exit from market- In
the long run firm earns zero economic
profits
VT-05 7
Markets for Compact Cars, No Trade to
Free Trade-Fig 6.4/6.5
If the world is now open to free
trade:
1. Domestic automobile company,
for example Ford, can export their
car models to foreign consumers.
2. Foreign automakers in the rest of
the world can export their car
models to the US
Note: With free trade the world
market is large (the combination of
two mkts & unit cost curve= Ucw).
Consumers enjoy more varieties of
cars (18 models) & with increased
competition a lower price (17
thousands/car)!
8
Monopolistic Competition: Autarky to Free Trade?
Autarky to Free Trade:
The demand curve shifts from D1 to D2
and the marginal revenue shifts to MR2 as
a result of trade. Entry or exit of firms
causes the final demand curve to be
tangent to the firm’s average cost curve,
but since the demand curve is more elastic
/flatter, the tangency occurs down and to
the right of the autarky intersection. In
the end, firm output rises and the price
charged in the market falls .
● The welfare effects of the monopolistic
comp model are positive: Improvements in
productive efficiency arise as firms produce
further down along their average cost
curves in free trade. Consumption
efficiency is raised because consumers are
able to buy the products at lower prices
and have a greater variety to choose from.
9
Limitations of Monopolistic Competition Model
In the monopolistic competition model, we are excluding (by assumption) two kinds of behavior:
● Collusive behaviour
-With price agreements: P > P*
● Strategic behaviour
-To deter competitors: Q > Q*
However, the monopolistic competition model is useful & helps to show how trade leads to:
-A lower average price due to scale economies

-The availability of a larger variety of goods due to product differentiation
-Imports and exports within each industry (intra-industry trade)
VT 10

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Scale Economies, Imperfect Competition, and Trade

Intra-Industry Trade for United States, ( 2012) –PUGEL FIG 6.2

1,723 1,962 3,684 (−)239 3,445 93.5

3,710 3,058 6,768 (+)651 6,117 90.4

Clothes washing machines 205 308 512 (−)103 410 79.9

33,483 27,490 60,973 (+)5,993 54,979 90.2

53,901 149,142 203,042 (−)95,241 107,802 53.1

323 134 456 (+)189 267 58.6

Photographic 2,414 1,712 4,126 (+)701 3,425 83.0

Country 1989 2005 2012

-A lower average price due to scale economies

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