World Economy Intra-industry trade Intra-industry trade arises if a country simultaneously imports and exports similar types of goods or services. A measure of the intra-industry trade that takes place between countries is the Grubel-Lloyd (GL) index. In intra-industry trade, the level of worker productivity is not determined by climate or geography. This same argument applies to trade between U.S. states, where people often buy products made by people of other states, even though a similar product is made within the boundaries of their own state. The economies of scale exist up to an output of 40,000 semiconductors; at higher outputs, the average cost of production does not seem to decline any further. Plant V, despite being larger, cannot produce more cheaply on average than plant L. The concept of economies of scale becomes especially relevant to international trade when it enables one or two large producers to supply the entire country. The demand for The project is being funded by Deutsche Gesellschaft fr Internationale Zusammenarbeit (GIZ) GmbH through the Intra-Regional Trade Facility Initiative (IRTF). The basis of this trade is that it enables consumers to have access to a broader variety of goods at lower prices, and enables producers to achieve economies of scale in production through having access to a larger market. Benefits of intra-industry trade critically depend on how efficiently each stage of production in a value chain is geared up from different regions. The sources of gains from intra-industry trade between similar economiesnamely, the learning that comes from a high degree of specialization and splitting up the value chain and from economies of scaledo not contradict the earlier theory of comparative advantage. The concept of economies of scale , as we introduced in Production, Costs and Industry Structure , means that as the scale of output goes up, average costs of production declineat least up to a point. At any quantity demanded above 40,000, this economy can take full advantage of economies of scale; that is, it can produce at the lowest cost per unit. sugar) then the GL index for that sector is equal to 0. Because firms split up the value chain, international trade often does not involve nations trading whole finished products like automobiles or refrigerators. If the quantity demanded falls below 40,000, then the economy by itself, without foreign trade, cannot take full advantage of economies of scale. INTRODUCTION Intra-industry trade (IIT) defined as simultaneous export and import of similar goods produced in the same industries is an exchange of highly differentiated goods produced by manufacturing sectors well developed especially in industrialized countries. The model shows how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market) and will simultaneously force the least productive firms to exit. The original H-O theory of international trade is not capable of explaining the intra-industry trade. How can there be any economic gains for a country from both importing and exporting the same good, like cars? Intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use their comparative advantages. Instead, they help to broaden the concept. See also Intra-industry trade. How does the curve illustrate economies of scale? Intra-industry trade among the Moreover, nations can take advantage of economies of scale, so that large companies will compete against each other across international borders, providing the benefits of competition and variety to customers. Production plant V still has an average cost of production of $10 per toaster oven. A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. In all of these categories, the United States is both a substantial exporter and a substantial importer of goods from the same industry. Donnenfeld, Intra-industry trade and imperfect information 409 The average quality of each country's imports also depends on the distribution of the other country firms, namely dF*(q) and dF(q). If a country only exports or imports good X (e.g. This article begins with a brief summary of Ricardian and factor endowment approaches to trade theory to highlight the contribution of intra-industry trade theory. Intra-industry trade Economists who studied comparative advantage were once puzzled by the trade between advanced European countries, like France and Germany, because the countries were not very different in terms of technology or resources. In fact, recent years have seen a trend in international trade, which economists call splitting up the value chain. In this example, economies of scale operate up to point L, but beyond point L to V, the additional scale of production does not continue to reduce average costs of production. The EAC The vertical axis measures the average cost of production. U.S. Census Bureau. He was speaking at the commissioning and handing over of the AfCFTA Secretariat building in Accra on Monday August 17, 2020. Instead, the level of worker productivi Large automobile factories in different countries can make and sell their products around the world. Thanks in large part to improvements in communication technology, sharing information, and transportation, it has become easier to split up the value chain. INTRODUCTION Intra-industry trade (IIT) defined as simultaneous export and import of similar goods produced in the same industries is an exchange of highly differentiated goods produced by manufacturing sectors well developed especially in industrialized countries. 1 of 12 Which of the following is an economic benefit when countries participate in intra-industry trading? Consider the category of machinery, where the U.S. economy has considerable intra-industry trade. Instead of production in a single large factory, different firms operating in various places and even different countries can divide the value chain. What can be the economic benefit of having workers of fairly similar skills making cars, computers, machinery and other products which are then shipped across the oceans to and from the United States, the European Union, and Japan? Suppose, for the sake of argument, that we focus on the sector cars. U.S. Bureau of Economic Analysis. Ho, Suppose you are explaining the benefits of free trade and someone states, &q, Is free trade likely to benefit a large, populous country more than a small , What are the two main sources of economic gains from intra-industry trade?, Is it possible to have a comparative advantage in the production of a good b, EMAILWhoops, there might be a typo in your email. Click 'Join' if it's correct. A measure of the intra-industry trade that takes place between countries is the Grubel-Lloyd (GL) index. Intra drink and its use You'll love. Similarity is identified here by the goods or services being classified in the same sector. Keywords: intra-industry trade, New Member States 1. International trade provides a way to combine the lower average production costs that come from economies of scale and still have competition and variety for consumers. In 2014, according to the Bureau of Economic Analysis, the United States exported $146 billion worth of autos, and imported $327 billion worth of autos. Keywords: intra-industry trade, New Member States 1. Initially comparative advantage was taken as a wider concept but intra-industry trade simplified the product more by breaking them into process and then taking advantage of comparative advantage. Why do similar high-income economies engage in intra-industry trade? In fact, it supports the idea of comparative advantage because we know we're taking a concept, given the different processes and the product involved, and the country's gaining greater benefit. When complementary trading firms have specialized workers and processes in a particular product, and they engage in intra-industry trade, it creates benefits from working together by creating _____. This paper develops a dynamic industry model with heterogeneous firms to analyze the intraindustry effects of international trade. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. It does not contradict the theory. The term is usually applied to international trade, where the same types of goods or services are both imported and exported. To be clear, even without union membership country n enjoys the benefits of intra- and inter-industry trade in global industries. Both nations can take advantage of extreme specialization and learning in certain kinds of cars with certain traits, like gas-efficient cars, luxury cars, sport-utility vehicles, higher- and lower-quality cars, and so on. Even after three months you will have more health, energy and vitality, and people will ask you how you have achieved! 2015. The curve illustrates economies of scale by showing that as the scale increasesthat is, as production at this particular factory goes upthe average cost of production declines. In the case of intra-industry trade between economies with similar income levels, the gains from trade come from specialized learning in very particular tasks and from economies of scale. trade of differentiated products of a single branch be-tween countries) rather than inter-industry trade is an important and constantly growing modern international sector. The terms G n Intra (t, U) and G n Inter (t, U) measure only the increase in the gains from trade that results from union membership, and not the total gains from trade. In the case of intra-industry trade between economies with similar income levels, the gains from trade come from specialized learning in very particular tasks and from economies of scale. When complementary trading firms have specialized workers and processes in a particular product, and they engage in intra-industry trade, it creates benefits from working together by creating _____. A high proportion of trade, however, is intra-industry tradethat is, trade of goods within the same industry from one country to another. Intra-industry trade between similar countries produces economic gains because it allows workers and firms to learn and innovate on particular productsand often to focus on very particular parts of the value chain. In intra-industry trade, the level of worker productivity is not determined by climate or geography. There are two reasons: (1) The division of labor leads to learning, innovation, and unique skills; and (2) economies of scale. If the opening (or expansion) of trade is mostly intra-industry, then the impact on the domestic distribution of factor income is relatively minor. Given this, because we know intra industry trade actually simplifies in the sense that supports the theory of comparative advantage and actually simplifies the product more because it splits it up into specific processes, one is able to put this up into processes. A large share of global trade happens between high-income economies that are quite similar in having well-educated workers and advanced technology. Production plant S produces a small level of output at 30 units and has an average cost of production of $30 per toaster oven. U.S. About 60% of U.S. trade and 60% of European trade is intra-industry trade. An example from textile sector would be to make yarn related production in Pakistan, processing for cloth in Bangladesh and printing and marketing through India. Visit this website for some interesting information about the assembly of the iPhone. What is the basis for trade: absolute advantage or comparative advantage? 30,000 semiconductors? Some writers have still made attempts to explain the intra-industry trade based on factor endowments by establishing link between the product specifications and the different combinations of the basic factors like labour and capital. Start by plotting the points on a sketch diagram and then drawing a line through them. this question massive intra industry trade contradicts the theory of comparative advantage. Machinery comes in many varieties, so the United States may be exporting machinery for manufacturing with wood, but importing machinery for photographic processing. Intra-industry trade has been a hot topic among trade economists for several decades, but it has received scant attention among economists in general. [link] shows how the average costs of production for semiconductors (the chips in computer memories) change as the quantity of semiconductors built at that factory increases. [link] shows some of the largest categories of U.S. exports and imports. It is not even determined by the general level of education or skill. However, if a country has only one or two large factories producing cars, and no international trade, then consumers in that country would have relatively little choice between kinds of cars (other than the color of the paint and other nonessential options). Instead, they help to broaden the concept. The following figure illustrates the average costs of production of semiconductors. Production plant M has an average cost of production of $20 per toaster oven. The value chain describes how a good is produced in stages. industries; they include product differentiation, marketing costs, plant economies of scale, industrial concentration, and offshore Ceteris paribus, gross exports will be the greater, the greater is the extent extent exports. Americas car producers make far better cars now than they did several decades ago, and much of the reason is competitive pressure, especially from East Asian and European carmakers. When production within an industry has this characteristic, specialization and trade can result in improvements in world productive efficiency and welfare benefits that accrue to all trading countries. In ter- and In tra-Industry 17 7 individual assembly. Indonesias intra industry trade is mainly intermediate goods such as primary and processed fuels and lubricant whereas Singapores intra-industry trade consists mainly of electronic goods, refined petroleum products, copolymerization, polymerization and natural rubber latex, which in Why might intra-industry trade seem surprising from the point of view of com. Examples of intra-industry trade include technology, beverages, minerals and automobiles. From earlier chapters you will recall that technological change shifts the average cost curves. Does intra-industry trade contradict the theory of comparative advantage? U.S. Census Bureau. International Trade in Goods and Services February 2015. Accessed April 10, 2015. https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. of of intra-industry intra-industry trade. As indicated in the beginning of the chapter, producing the iPhone involves designing and engineering the phone in the United States, supplying parts from Korea, assembling the parts in China, and advertising and marketing in the United States. Inter-industry trade is in direct contrast to intra-industry trade that is a result of imperfect competition between nations having identical factor endowments (Falvey and Kierkowski, 1987, 143-161). 2015. In the UK over 80% of manufacturing trade was intra-industry trade in the period 1997-2008.4 Specialization in the world economy can be very finely split. There are a number of possible advantages of intra-industry trade. Countries usually engage in inter-industry trade according to their competitive advantages.Intra-industry trade, on the other hand, is a trade of products that belong to the same industry. It is just that, in working on very specific and particular products, firms in certain countries develop unique and different skills. Intra-African trade in manufacturing declined from 18% in 2005 to about 15% between 2010 and 2015. Intra-industry trade means trade within the same industry, e.g., steel-for-steel. Consider two countries: South Korea and Taiwan. Gravity model of trade [link] illustrates economies of scale for a plant producing toaster ovens. Furthermore, the Department of Trade, Industry and Competition, using a Trade Law Centre report, points to evidence that there has been a steady increase in Africa between 2017 and 2018. Plant M produces at a medium level of output at 50 units, and has an average cost of production of $20 per toaster oven. Do consumers benefit from intra-industry trade? For example, Germany exports Mercedes and BMW cars, but imports Peugeots and Renaults. For example, a single large automobile factory could probably supply all the cars consumers purchase in a smaller economy like the United Kingdom or Belgium in a given year. The demand for What we know is that the answer is no. extent of intra-industry specialization in trade between pairs of countries. Taiwan can produce one million mobile phones per day at the cost of $10 per phone and South Korea can produce 50 million mobile phones at $5 per phone. An economy, especially a smaller country, may well end up specializing and producing a few items on a large scale, but then trading those items for other items produced on a large scale, and thus gaining the benefits of economies of scale by trade, as well as by direct production. The concept of economies of scale, as we introduced in Production, Costs and Industry Structure, means that as the scale of output goes up, average costs of production declineat least up to a point. international trade consists of two flows: inter-industry trade and intra-industry trade. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. The simplest answer to this question is that the small country could have a large enough factory to take full advantage of economies of scale, but then export most of the output. Plant L produces 150 units of output with an average cost of production of only $10 per toaster oven. Much of their trade is intra-industry trade. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers. If General Motors, Ford, and Chrysler were the only players in the U.S. automobile market, the level of competition and consumer choice would be considerably lower than when U.S. carmakers must face competition from Toyota, Honda, Suzuki, Fiat, Mitsubishi, Nissan, Volkswagen, Kia, Hyundai, BMW, Subaru, and others. Intra-industry trade refers to the exchange of similar products belonging to the same industry. The Prevalence of Intra-industry Trade between Similar Economies. Draw a graph showing how technological change could influence intra-industry trade. Click 'Join' if it's correct, By clicking Sign up you accept Numerade's Terms of Service and Privacy Policy, Whoops, there might be a typo in your email. Why might intra-industry trade seem surprising from the point of view of comparative advantage? Instead, how firms engage in specific learning about specialized products, including taking advantage of economies of scale determine the level of worker productivity. If a country only exports or imports good X (e.g. This paper develops a dynamic industry model with heterogeneous firms to analyze the intraindustry effects of international trade. What about if quantity demanded is 70,000 semiconductors? One of the advantages of intra-industry trade is the division of labor which leads to _____. THE East African Women in Business Platform (EAWiBP) has partnered with East African Community (EAC) Secretariat to launch the project on value addition for increased market access in the Moringa products. Indonesias intra industry trade is mainly intermediate goods such as primary and processed fuels and lubricant whereas Singapores intra-industry trade consists mainly of electronic goods, refined petroleum products, copolymerization, polymerization and natural rubber latex, which in It is not even determined by the general level of education or skill. For example, they help to explain the patterns that we noted at the start of this chapter, like why you may be eating fresh fruit from Chile or Mexico, or why lower productivity regions like Africa and Latin America are able to sell a substantial proportion of their exports to higher productivity regions like the European Union and North America. The horizontal axis of the figure shows the quantity of production by a certain firm or at a certain manufacturing plant. For semiconductors, countries like Taiwan and Korea have recently fit this description. increase in intra-industry trade - the intra-industry share of manufacturing trade has increased significantly since the late 1980s, although it varies by country, from around 30% for Iceland to 90% for Belgium. Intra-industry trade (i.e. In this vision, comparative advantage can be dynamicthat is, it can evolve and change over time as one develops new skills and as manufacturers split the value chain in new ways. The underlying reason why a country like the United States, Japan, or Germany produces one kind of machinery rather than another is usually not related to U.S., German, or Japanese firms and workers having generally higher or lower skills. In other words countries will get more economic benefits if they concentrate on producing specific types of products within specific range, according to their comparative advantages rather than producing all ranges of specific products By the end of this section, you will be able to: Absolute and comparative advantages explain a great deal about global trading patterns. Thus, production plant M can produce toaster ovens more cheaply than plant S because of economies of scale, and plants L or V can produce more cheaply than S or M because of economies of scale. New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries would then allow those sectors to dominate the world market via a network effect. Next, the article discusses the foundations of intra-industry trade theory and the significance of intra-industry trade for an economy. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. M. E. Sharpe Inc, 2000. 177-183. http://cnx.org/contents/27f59064-990e-48f1-b604-5188b9086c29@5.5, Identify at least two advantages of intra-industry trading, Explain the relationship between economies of scale and intra-industry trade. The sources of gains from intra-industry trade between similar economiesnamely, the learning that comes from a high degree of specialization and splitting up the value chain and from economies of scaledo not contradict the earlier theory of comparative advantage. What Do Undergraduates Really Need to Know About Trade and Finance? in Political Economy and Contemporary Capitalism: Radical Perspectives on Economic Theory and Policy, ed. Production plant L has an average cost of production of only $10 per toaster oven. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. Little or no competition will exist between different car manufacturers. Vernengo, Matias. Intra-industry trade supports the concept of comparative advantage because it extends the concept from product to different process of product and countries gain greater benefit. Assume these phones are the same type and quality and there is only one price. Initially comparative advantage was taken as a wider concept but intra-industry trade simplified the product more by breaking them into process and then taking advantage of comparative advantage. Indeed, if the quantity demanded was quite high, like 500,000, then there could be a number of different factories all taking full advantage of economies of scale and competing with each other. The present paper combines the two approaches in the framework of a multi-country and multi-industry model. Do consumers benefit from intra-industry trade? Instead, the level of worker productivi However, the economies of scale end at an output level of 150. Besides a range of country-specific determinants this work has shown that scale economies, product differentiation and imperfect competition are typically important. Can a nations comparative advantage change over time? A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. One of the advantages of intra-industry trade is the division of labor which leads to _____. E.g. E.g. One of the main findings is that the observed increase in intra-'industry' trade in Europe is almost entirely due to two-way trade in vertical differentiation: benefits of IIT. How does comparative advantage lead to gains from trade? sugar) then the GL index for that sector is equal to 0. Similarity is identified here by the goods or services being classified in the same sector. A slightly more complex answer is that the country can get these benefits of economies of scale without producing semiconductors, but simply by buying semiconductors made at low cost around the world. What is the minimum price at which both countries will engage in trade? It analyses the determinants of gross trade between pairs of countries in individual industries. Does intra-industry trade contradict the theory of comparative advantage? Ron Baiman, Heather Boushey, and Dawn Saunders. Armonk. U.S. results in intra-industry trade (IIT). Even the general level of education or skill does not determine it. Inter-industry trade is a trade of products that belong to different industries. A great deal of theoretical effort has been expended in explaining the circumstances in which IIT will arise. The sources of gains from intra-industry trade between similar economiesnamely, the learning that comes from a high degree of specialization and splitting up the value chain and from economies of scaledo not contradict the earlier theory of comparative advantage. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. Economies of Scale Production Plant S, has an average cost of production of $30 per toaster oven. 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