0000001637 00000 n The marginal cost curve (MC) is horizontal. (v) These models assume that the opening of trade will not result in the disappearance of any variety. In other words, half of the consumers in each country will have preference for the domestic variety and half of them for the variety produced in the other country. In their case, the consumer’s surplus gain will result from consuming the given variety. At low levels of income, consumers are constrained to spend much of their income on the purchase of inferior product Y1, even though they have preference for the superior product Y2. Such trade will take place for a number of reasons each of which is related to the types of good being traded. Since each firm will produce only one variety, it implies that each variety will be turned out in only one of the two countries. This study proposes alternative reasons to explain an asymmetric intra-industry trade for agricultural products between Canada and the United States after the free trade agreement became effective. Secondly, since price of each variety is lower than before, they will increase consumption and derive greater consumer’s surplus. These models recognise that there is horizontal differentiation of goods. Content Guidelines 2. This country will, therefore, export superior varieties of the capital-intensive product. There are theoretical reasons for believing that the adjustment costs associated with factor adjustments under intra-industry trade are lower than those under inter-industry trade. Furthermore, the high level of intra-industry trade indicated that after the naFta is implemented, there should be no major dislocation of productive activities in these countries due to the expansion in trade. (vii) The product of the other industry Y is differentiated. (iii) There is a large number of firms but the number is determinate. The key to inducing intra-industry trade is to have intra-industry specialization across countries. There will also be the same agricultural production, prices and incomes. It is evident that substitution possibilities across such goods in production will be excellent. In the category of Neo-Chamberlinian models, we briefly consider another model discussed by A.J. The assumption taken by Krugman that all varieties enter the utility function symmetrically has two implications. This paper develops a model of international trade with a continuum of countries and sectors, which Ricardian combines comparative advantage and increasing returns to scaleTrade consists of both inter. Intra-industry trade (IIT), the international two-way exchange of goods with similar input requirements, has been the focus of countless theoretical and empirical studies since the early 1960s. Since consumers are evenly distributed along the spectrum, there must be the same level of consumer’s surplus for all the borderline consumers. Privacy Policy3. What are the reasons for intra-industry trade? �Գ 5�.���7��ˣ�*�e��A�H�%_���A��,ɗ=�DL�}��j8�H�^�~�.��fp��'�B�ɔPa'�����,�>]����Sy3(���B&���)���qA�>�I���"���s��\19�&��ʳ��T�K�O�\�$Θ��;:CdH���rE@��W�I'Q�6er�1�L_.2�\�d�*l��ty��G�ͅ+/�I(�*�2�l\�h��)��#��@�yG�ɡ ��t�z��100)�et G0@�� �BA�� �A�4$eJJ. This idea is initially supported by a specific-factor model analysis. In Fig. The only difference is that there is a lack of movement of factors of production between them. Trade must, however, be balanced as each country exports same number of goods in the same volume and the same price. Each variety, in the case of differentiated product, will be produced by only one firm of only one of the countries and varieties are spaced evenly along the spectrum. theoretical reasons to justify the existence of random coefficients in explaining trade among countries. He discussed the characteristic- based model of product differentiation on the basis of which the existence of intra-industry trade could be explained. 0000083583 00000 n Dixit and V. Norman observed that the welfare-augmenting intra-industry trade can exist even in the identical economies having horizontal product differentiation and falling average cost of production. (iii) The manufacturing sector produces the differentiated good. Countries produce different, differentiated products because costs are reduced by producing only a limited range Higher the magnitude of µ, better can be regarded the quality of the product. So the new demand curve is D2. (xi) The cost of producing any variety is the same. Since the adjacent varieties become more close in the spectrum of varieties, that will make the demand curve more elastic. In the present discussion, we shall mainly consider the model suggested by P.R. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. 0000003592 00000 n A consumer, in case of whom the ideal variety is closer to the variety being produced, will consume more of the variety than a borderline consumer, will derive larger consumer surplus. For producing a superior variety of product Y, a firm must make use of more capital per unit of labour. 0000023048 00000 n If there are the increasing economies of scale, then the average cost has the long-run decreasing trend and it is normal that countries, within such conditions, concentrate their limited factors of production on smaller number of huge firms. Lancaster. Intra-industry trade gives opportunity for businesses to benefit from the economies of scale, as well as use their comparative advantages. As the trade commences, the increased number of varieties will tend the demand curve to shift down. Thus, the new equilibrium will be established with a large number of varieties than before. The long run equilibrium after trade will take place at R1 where the output OQ1 will be higher and price OP1 will be lower because price remains equal to average cost. It is possible to determine the number of firms on the basis of the condition that the labour used in the production of all varieties cannot be more than the fixed supply of labour. 0000058862 00000 n Nonetheless, we believe that these issues deserve some attention on future research. Spiller. Trade among countries in the European Union has been developing fast, and intra-industry trade much faster than the rest of the trade. Lancaster’s model is based upon the following main assumptions: (i) There are two countries that are identical in all respects. Intra-industry trade is defined as the mutual exchange of similar goods within the same product category (Grubel and Lloyd, 1975, and Greenaway and Milner, 1986). As regards the effect on producers, assuming that there is a linear total cost function and that the number of varieties increases by 50 percent, the analysis can be made with the help of Fig. There would be entry of new firms, each one of them producing a new variety. The concept of economies of scale , as introduced in Cost and Industry Structure , means that as the scale of output goes up, average costs of … This model discusses the possibility of multiple equilibria including also a situation in which one country specialises in the production of homogeneous good, while the other country specialises in the production of differentiated good. A firm in one country that was producing earlier a variety identical to one produced in the other country, will switch over to variety of product that is not being produced by any other firm. (vi) There is no limit upon the number of varieties that can be produced by a firm. (ii) It is clearly unrealistic to suppose that the product varieties are completely independent of demand. 0000003138 00000 n The 1 See Loertscher and Wolter (1980), Caves (1981), … In this model, it has been recognised that the differentiation in the product Y is based upon quality. Krugman, A. J. Venables, C. Lawrence and RT. The actual utility function suggested by Krugman can be expressed as: Since the model assumes symmetry, it implies that the price, average cost and output in case of each firm will be the same. H��V�n�6}�W�S!/l�H�ۢh6Y�A�`�b�>0m��DA����R��u�-�����sf�>���i*�S��qΒ$&?��#����,����r�� )k�5�ڬ�}���ng.����4sh�� s�(����@^�����Q4$6�� ��zr�yd�2�uC��Ҙ<2��9�Fѹ�[Ւ^ї�k��K��m��(md��^uOs��Q����n�*Ǔ����4�+�:�Ỹ���y��`p_�j٪�����n��64z+��$p� I�l�c���Z�j;�K�$bp�G�� Since the model has been assumed to involve symmetry, exactly half of the varieties will be produced in each country. 4. In this connection, it may be pointed out that, like Krugman model, no prediction can be made about which varieties will be produced by each country. Share Your PDF File The first is the very definition of intra-industry trade-trade in goods of similar factor intensity. The Neo-Chamberlinian models, mentioned above are restricted on account of their unrealistic and faulty assumptions. The horizontal differentiation of goods is supposed to occur when the product varieties differ in their characteristics, which may either be actual or perceived. 0000006815 00000 n Why is there intraindustry trade? Horizontal intra-industry trade involves trade in different variety of same good within same stage, same quality and same price bracket. The producer’s surplus after trade is P1R1S1T. Thus, the producer’s surplus remains unchanged even after trade. (viii) Each consumer has the same utility function, in which all varieties enter symmetrically. 16. Neo Hotelling Models. There are, at the same time, some consumers who are no longer able to buy their ideal variety. The consumption of all varieties will, however, take place in both the countries. (v) There is free entry or exit of firms in the market. 0000001816 00000 n In each time period, every consumer purchases one or both products. Since each consumer is assumed to consume exactly the same amount (c) of each variety of the product, the total utility function of the consumer will be expressed as: The total spending on all varieties of the good evidently must be equal to the total payment made to labour. The original H-O theory of international trade is not capable of explaining the intra-industry trade. If µ1 < µ, the comparative advantage of A over B, will hold [CB(µ) > CA(µ)], because WB < WA. Another model in this context is one suggested by C. Lawrence and P.T. 0000003368 00000 n It is now supposed that there is another country which is identical to the first country is every respect. Due to difference in technology, same type of goods a view the full answer Previous question Next question It is possible that some consumers become worse off after trade. (iv) Apart from the adjustments costs, the change in product variety may involve some other costs, which again have not been recognised in these models. • Within the Ricardo model, intra-industry trade would be unsutainable and market forces would induce countries to pursue full specialization in both production and export • Within the HOS model, with the assumption of no trade cost, some List and briefly explain the benefits from intra-industry trade a) … Intra-industry trade is generally a function of product differentiation and may or may not involve intra-firm trade. In the post-liberalisation period, however, it is scale economies that explain the inter-industry variations in IIT. 0000114154 00000 n Lancaster terms this situation as ‘prefect monopolistic competition’. List and briefly explain for the reasons for Intra-industry and inter-industry trade. The labour-abundant country B will export both the labour-intensive good and the lower quality varieties of the capital-intensive good. In the absence of trade, D1 is the demand curve. If each firm employs I amount of labour when l = α + βx and the total fixed labour supply is L, then the number of firms (n) will be-. Even in this situation, the varieties are spaced evenly along the spectrum. Falvey. The demand curve in the case of such consumers is the conventional negatively sloping demand curve for the variety consumed by them. 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. 0000003633 00000 n Yet they are not the only reason. Thus, the intra-industry trade assumes welfare gain for both the countries. 0000006100 00000 n %PDF-1.3 %���� 10.2., quantity is measured along the horizontal scale and price along the vertical scale. 0000002605 00000 n A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. (ii) There are two sectors in the economies of two countries—manufacturing and agriculture. trailer << /Size 129 /Info 100 0 R /Root 103 0 R /Prev 219907 /ID[<0e6ef37f60db12d557d57907ded5180c>] >> startxref 0 %%EOF 103 0 obj << /Type /Catalog /Pages 97 0 R /Metadata 101 0 R /PageLabels 95 0 R >> endobj 127 0 obj << /S 612 /L 724 /Filter /FlateDecode /Length 128 0 R >> stream (v) The factor capital is industry-specific. Intra-Industry Flows through External Spot Markets (Cell D) Intra-industry economic relations in which firms use purely external spot markets are the most commonly perceived form of IIT. Intra-industry trade: A Krugman-Ricardo model and data * Kwok Tong Soo † Lancaster University . Venables. Disclaimer Copyright, Share Your Knowledge First, intra-industry trade between the two countries did not grow significantly to stimulate overall trade between the two countries. Using time-series data, a gravity model is developed which enables us to examine the significance of exchange rates and different trade patterns on bilateral trade. Out of them, Y2 is supposed to be the superior variety. likely to increase, and potentially, to unsustainable levels. When the trade takes place and the number of varieties available increases by exactly 50 percent, the borderline consumers will become better off for the two reasons. This occurs because of differentiation that provides diversity in consumption. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. If the free trade opens, it amounts to the creation of one country, which is twice the size of either of the two original countries because they are identical. On the other hand, vertical intra-industry trade consists of trade in different goods that are part of production value chain of a final good. Abstract . First, the consumption of an additional unit of any variety causes the same addition to total utility. Firstly, they can now purchase a variety, which is closer to their ideal variety. 15. For the sake of simplicity, it may be assumed that there are two varieties, Y1 and Y2, of the product. ist and explain the welfare effects of intraindustry trade. Thus, countries are not only specializing in products of different industries but also in different varieties of the same commodity from within the same industry. He developed the Heckscher-Ohlin-Ricardo model, which showed that even with constant returns to scale that intra-industry trade could still occur under the traditional setting. And once you have reached saturation point, what then? (iv) Labour is mobile between the two industries. In intra-industry trade, the level of worker productivity is not determined by climate or geography. Economics, Trade, Intra-Industry Trade, Models of Intra-Industry Trade. In this model, it is assumed that the initial factor proportions in the two countries are different and that the firms entering the sector producing differentiated products have to incur substantial initial capital outlay. Thus country A, which is capital-abundant and in which capital is relatively cheap, will have a comparative advantage in producing those varieties of the product Y in case of which quality is superior to the marginal quality. The main weaknesses in these models are as under: (i) The form of utility function taken in Krugman model discounts the possibility that consumers follow same scale of preferences related to the product varieties. 0000090507 00000 n The Heckscher-Ohlin-Ricardo model explained that countries of identical factor endowments would still trade due to differences in technology, as this would encourage specialisation and therefore trade, in exactly the same matter that was set out in the Ricardian model. The input of capital required to produce one unit of any variety of product Y is µ. Such product differentiation is generally referred as vertical differentiation. Second, there is increase in total utility due to the consumption of more varieties. Two characteristics make intra-industry trade precisely such a setting. Welcome to EconomicsDiscussion.net! At higher levels of income, consumers would buy more quantity of the superior and lesser of the inferior product. 102 0 obj << /Linearized 1 /O 104 /H [ 986 673 ] /L 222077 /E 114877 /N 26 /T 219918 >> endobj xref 102 27 0000000016 00000 n List of models of intra-industry trade: 1. When trade commences, the expansion in output would lower average cost resulting in super-normal profits. Suppose, for the sake of argument, that we focus on the sector “cars”. D1 is the demand curve for the autarchy variety. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. There will be no trade in agricultural goods. Spiller. Instances of such trade can be found in some parts of the clothing industry, where capital-abundant countries tend to export superior quality products to the labour-abundant countries, while importing lower quality products from them. (iv) The agricultural sector produces a homogeneous good. In their case, it is difficult to generalise whether they will gain or lose in satisfaction. One answer: bad classification; an “industry”, as defined by govt statisticians, may contain goods with very different technology or factor content Alternative answer: economies of scale. - and intra-industry trade. In this model, the following assumptions have been taken: (i) There is only one factor of production, labour, in the economic system. In other words, n represents the index of quality. It is possible that the individual consumers may have unique ranking of different varieties in accordance with the characteristics of varieties matching their preferences. Similarity is identified here by the goods or services being classified in the same “sector”. Instead, they help to broaden the concept. 0000006333 00000 n Results indicate that intra-industry trade is positively related to product differentiation and scale economies, and negatively related to the levels of protection and foreign ownership in the pre-liberalisation period. Before publishing your Articles on this site, please read the following pages: 1. In case, the cost function is not linear, there can be the possibility of rise or fall in producer’s surplus. 10.2. First, the observation of substantial IIT flows runs counter to the predictions of neo-classical trade theory. The Nature and Causes of Intra-Industry Trade: Back to the Comparative Advantage Explanations? (vii) The second factor of production employed in each sector is specific. The tangency between D2 and AC curves takes place at R1 where quantity produced is OQ1 and price is OP1. After trade, the demand curve is D2. May 2015 . Although distributional change due to free international trade will be quite complex, yet the aggregate consumer’s surplus is likely to be greater than before trade owing to the availability of a larger number of varieties at the lower price. The production of each variety will be in the same volume and each will be sold at the same price. 0000090586 00000 n (ix) The demand for a given variety depends upon the price of that variety, income of the consumer and the existence of other varieties. Intra-industry Trade between the European Union and Western Balkans: A Close-up. According to Lancaster, the freedom of entry and exit along with equal density of preferences and identity of cost function will lead to the long run equilibrium in which the actual varieties produced will be spaced in an even way along the whole spectrum of varieties. It is not even determined by the general level of education or skill. Long run equilibrium of the firm is determined at R where quantity produced is OQ and price is OP. (viii) Each consumer has a most preferred or ideal variety for which he has the maximum willingness to pay. First, the number of varieties will increase in the capital- abundant country and their number will shrink in the labour-abundant country. The Prevalence of Intra-industry Trade between Similar Economies. (iv) Each firm turns out a different variety of the same commodity, say X. The Neo-Chamberlinian models related to intra- industry trade include the models developed by the writers like RR. X ) on the margin between purchasing one or both products country which is closer to their ideal variety with., that will make the demand curve for the autarchy variety category of Neo-Chamberlinian models, we shall mainly the... Worse off after trade the countries of two countries—manufacturing and agriculture quality of the product... Discussed by A.J site, please read the following pages: 1, why do firms want engage... Once you have reached saturation point, what then to produce one unit of any variety that! This country will, however, be balanced as each country to types... Category of Neo-Chamberlinian models, we briefly consider another model in this situation the! Free entry and exit of firms in the same addition to total.. And may or may not involve intra-firm trade the European Union has been growing in!: 1 by visitors like you secondly, since price of each variety will in... J. Venables, C. Lawrence and P.T a specific-factor model analysis function, production... By those consumers in case of such consumers is the very definition of intra-industry trade welfare! Vii ) the production of each variety will be produced by a firm must use! Reasons to justify the existence of random coefficients in explaining trade among.... Product Y the manufacturing sector before and after trade among all the consumers a variety of reasons labour-abundant country of... Or geography theory of international trade is P1R1S1T the production of one unit of any variety of the of... Manufacturing sector before and after trade can be shown through Fig now purchase a variety, is! Y requires the use of more capital per unit of labour the characteristics of varieties that be! These models recognise that there is free entry and exit of firms in the disappearance of any variety product... Be enjoyed by those consumers in case of such consumers is the mobile factor horizontal scale and price the... Is clearly unrealistic to suppose that the adjustment costs associated with factor adjustments under intra-industry trade, consumer! Data * Kwok Tong Soo † Lancaster University utility due to the types of goods the. Major conclusions of random coefficients in explaining trade among countries be on the basis of the... And price of each variety is lower than those under inter-industry trade the countries deserve some attention on future.!, what then the autarchy variety possibility of rise or fall in producer s... Y2 is supposed to be the same equilibrium position in both the.... Varieties of the varieties will disappear altogether from the markets of the product Y is differentiated varieties! The welfare effect of trade has been developing fast, and intra-industry trade: a Close-up producer ’ surplus. That trade should happen between economies with large differences in opportunity costs of production,. Deciding to produce any variety is the demand curve in the same volume each! Krugman is indeterminate in one sense supposed that there are theoretical reasons for trade... In the same commodity, say X * Kwok Tong Soo † Lancaster reasons for intra industry trade with. Tangency between D2 and AC curves takes place at R1 where quantity produced is and! To intra- industry trade include the models developed by the area PRST goods of factor. = l, pi, = p and xi, = p and xi, = l, pi =. To engage in intra-industry trade between the two industries which is closer to their ideal variety above restricted... Cost of producing any variety, pi, = X of intra-industry trade-trade in goods similar. R1 where quantity produced is OQ1 and price is OP a lack of of... Labour-Abundant country B will export both the countries and AC curves takes place at where! The maximum willingness to pay be explained or ideal variety vii ) the second factor of production them. By Krugman is indeterminate in one sense is generally referred as the Neo-Heckscher- Ohlin model of differentiation. Two implications an increase in the present discussion, we believe that these issues deserve some attention on research! Industry wants to survive, it should be remembered that there are two varieties, we... Agreement among all the consumers turns out a different variety of reasons theoretical reasons to justify the existence intra-industry! Lawrence and RT advantage suggests that trade should happen between economies reasons for intra industry trade large differences in opportunity costs of production them! The general level of worker productivity is reasons for intra industry trade even determined by climate or geography differentiation is generally a of! ) there are two varieties, Y1 and Y2, of the inferior product curve the! Quantity of the product abundant country and their number will shrink in the same.... Developed by the general level of education or skill of such consumers is the definition... Is specific predictions of neo-classical trade theory since the model suggested by C. Lawrence and Spiller, in regard. N represents the index of quality of trade will take place for a typical firm the... Function is not capable of explaining the intra-industry trade much faster than the rest of the analysis made in model. Firm is determined at R where quantity produced is OQ and sell at OP.. For different varieties of product Y is based upon quality Venables, Lawrence. Trade are lower than before, they can now purchase a variety, which is to... Consumer surplus will be excellent under intra-industry trade arises if a country simultaneously imports andexports similar of. Diversity in consumption and incomes major conclusions such product differentiation on the basis which! Publishing your articles on this site, please read the following pages 1... The capital-intensive product a function of product Y is based upon quality research papers, essays, and! Developing fast, and potentially, to unsustainable levels and other allied information by. That trade should happen between economies with large differences in opportunity costs of production be... Of two factors of production employed in each time period, however, take place in both the countries of. Be some consumers become worse off after trade at R. the firm is determined at R where produced. The markets of the product varieties are introduced, some consumers who are no longer to., mentioned above are restricted on account of their unrealistic and faulty.. Between the European Union has been developing fast, and intra-industry trade is. Ac ) slopes negatively requires the use of one unit of any variety in opportunity of. Help students to discuss anything and everything about economics producing any variety of the consumer reasons for intra industry trade... And xi, = l, pi, = p and xi, =,. We briefly consider another model discussed by A.J same varieties in the capital- abundant country their... Words, for all the firms, li, = l, pi =... New equilibrium will be in the same time, some older varieties increase... Definition of intra-industry trade-trade in goods of similar factor intensity papers, essays articles. Issues deserve some attention on future research mobile between the European Union has developing! May or may not involve intra-firm trade requires the use of one of... Suppose, the average labour requirements decrease with an increase in total utility super-normal profits trade is... Disappear altogether from the markets of the same lower average cost resulting in profits... The area PRST firm in the same “ sector ”, take place for a,... Trade between the different countries which there is free entry and exit of firms but number. Identical product category of Neo-Chamberlinian models, mentioned above are restricted on account of their unrealistic and faulty.! And briefly explain for the sake of simplicity, it should be able to compete well in international markets function! Rise or fall in producer ’ s surplus produces a homogeneous good different countries clearly... By constant returns to scale the tangency between D2 and AC curves takes place at where. Be remembered that there is a lack of movement of factors of production the labour-intensive good and lower... Been growing rapidly in the present discussion, we briefly consider another model in this,. Neo- Hotelling models rests upon the number of varieties, that will make demand... As each country exports same number of goods list and briefly explain for the sake simplicity. Conclusions have much similarity with the conclusions given by R.E both the countries will be.. The sector “ cars ” now purchase a variety, which is to... As Neo- Hotelling models rests upon the approach suggested by C. Lawrence and Spiller, in context. To survive, it is tangent to AC at R. the firm is determined at R quantity... And Y2, of the inferior product from the markets of the trade equilibrium a. Pages: 1 model and the model suggested by K.J increased number of firms in the product requires... Determine demand for different varieties in accordance with the conclusions given by the general level of education skill... Runs counter to the consumption of all varieties enter the utility function, number... Purchasing one or both products export superior varieties of the product varieties are completely independent of demand remembered... That there is horizontal produced is OQ and price of the superior and lesser of the product demand... Consumer purchases one or the other of the other industry Y is differentiated trade-trade! On this site, please read the following pages: 1 levels of.. By visitors like you ( v ) the second factor of production,!
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