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New Trade Theories Sample Essay

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New Trade Theories Introduction/Theoretical critique of HO: The Heckscher­Ohlin cannot be extended to a multi­country, N­commodity 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 intra­industry 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 intra­industry 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

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