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Economics Notes International Trade Notes

New Trade Theories Sample Essay

Updated New Trade Theories Sample Essay Notes

International Trade Notes

International Trade

Approximately 8 pages

This module involves traditional and alternative models of international trade; the determinants of the pattern of trade; the effects of trade on the distribution of income; free trade versus protection; trade in factors of production; and multimationals and trade.

The topical notes included are:

Empirical Evidence
[Assessing the empirical evidence of the impact of international trade on growth, Inequality and Poverty]

Trade Policy
[Ideals behind trade protection advocacies, Brandon S...

The following is a more accessible plain text extract of the PDF sample above, taken from our International Trade Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

New Trade Theories

Introduction/Theoretical critique of HO:

The Heckscher-Ohlin cannot be extended to a multi-country, N-commodity trade system that is reflective of real life. Comparative advantage and relative abundance of factors are taken as a given, and there is no room for economic policy. Frederich List argued against free trade advocacy, on the grounds that it only worked for countries of equal development, that gov’t intervention was required to promote development and not through markets. Domestic strength is promoted in an inherently oligopolistic framework.

Benefits of New Trade Theories

New trade theories advocate increasing returns to scale and falling average costs. External economies of scale are where falling costs per unit depend solely on the size of the industry and exhibit competitive firm behaviour. Internal economies of scale are falling costs per unit depending on the size of the firm, and thus have oligopolistic market behaviour. The gains from trade go beyond comparative advantages, enhancing efficiency and allowing for intra-industry trade via product diversification. Through this, new trade theories are better at explaining actual trade patterns. I will discuss the implications, which are….

Autarky

If we analyse the market in autarky, we can observe the gains from trade. The country with a lower price and potential of falling avg. costs increases output and exports. Gains from trade occur through concentration of production and specialisation. Prices will fall everywhere due to higher demand and higher consumption levels. Horizontally differentiated products will enable intra-industry trade demand, and as such, there will be no equalisation of prices.

Dynamic Increasing returns to scale

The above example of gains from trade is a static model. Alternatively, average costs may decrease as cumulative output increases. I.e. learning by doing and the accumulation of knowledge. Kaldor suggested the idea initially that economies develop by evolutionary build up rather than market equilibria and need nudging in the right direction by state planning: first mover advantage and path dependency principles support such a strategic notion for firms. Higher output causes higher productivity and is particularly true for the manufacturing sector, where gains in efficiency may result from experience. A virtuous cycle ensues, as higher productivity should then in turn stimulate output growth. This is Verdoorn’s Law. It is argued developing countries have advocated infant-industry trade protection to benefit from dynamic returns. For example, Brazil enforced strict controls on computer imports during the 1980s to improve domestic competitiveness.

External Scale Economies

Increasing ROS and falling costs can be achieved through external economies of scale. These are established through the local concentration of production via three main factors: knowledge spillovers, labour market pooling, and vertical linkages. The knowledge economy is as important now as any other factor input, especially so for highly innovative industries. One important source of innovation is the informal transfer of knowledge between workers on a personal level between local firms. Industrial clusters also create pooled markets for workers with specialised skills, preventing labour shortages and unemployment spells. In many industries, specialist equipment and support is needed for production. A localised cluster of firms minimises costs for suppliers of specialist equipment by providing an adequately sized market, and thus reducing costs for the purchasing firms.

Silicon Valley is an obvious example for the semi-conductor industries. Formula 1 also exhibits external economies. Redbull, Renault and Honda are all located in the East Midlands. There is a rapid turnover of staff,...

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