19/09/2024
Beyond Comparative
Advantage
Gerber (2017) and multiple sources
Jean Lima, PhD
Brasilia/Federal District
Introduction: More Reasons to Trade
• Intraindustry trade
• Trade and geography
• Economics of scale (internal and external)
• Industrial policies
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Introduction: More Reasons to Trade
• Trade models built exclusively on the idea of comparative advantage have a
mixed record when it comes to predicting a country’s trade patterns.
• It is exceedingly difficult to precisely measure a country’s comparative
advantage.
• There are many potential products an economy might export that use the
same comparative advantage, and there is no way to determine which
specific products will dominate.
• A large share of international trade is not based on comparative advantage.
• An important share consists of countries exporting the same thing they
import.
• The importance of industrial clustering
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Intraindustry Trade
• The models of comparative advantage are built on the
foundation of country differences
• productivity, factor endowments.
• Intraindustry trade is the international trade of products
made within the same industry
• Why countries often export the same goods they import, and
the benefits from this type of trade?
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Characteristics of Intraindustry Trade
• Empirical measures - fundamental problem of defining an
industry.
• For example, if computers are defined as office machinery.
• In general, the more broadly an industry is defined, the more
trade appears to be intraindustry.
• Evidence suggests that intraindustry trade is greater in
• high-tech industries
• countries that are more open to trade
• nations that have received larger amounts of foreign direct investment.
Characteristics of Intraindustry Trade
• In the models of comparative advantage-based trade, production costs are
either constant or increasing.
• The production of many goods, however, is characterized by economies of
scale, or decreasing costs.
• In New Trade Theory, economies of scale can be either internal economies
of scale or external economies of scale
• Internal economies are defined as falling average costs over a relatively
large range of output.
• In practice, this leads to larger firms (size confers competitive advantage)
• Increasing returns are associated with products that have a large fixed cost
component.
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Characteristics of Intraindustry Trade
• Internal economies of scale have important implications.
• In an oligopoly, a handful of firms produce the entire market output.
• Often, internal economies lead to the relatively common market
structure called monopolistic competition.
• In monopolistic competition, there is competition among many firms,
but their competition is attenuated by the practice of product
differentiation.
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Characteristics of Intraindustry Trade
• The presence of internal economies of scale is the reason
why firms want to enter export markets.
• Any firm that exports has a competitive advantage since it
will have higher sales and be able to take advantage of the
cost-reducing effects of its internal economies of scale.
The Gains from Intraindustry Trade
• Intraindustry trade also creates gains from trade.
• While the increased size of the market leads to lower costs through
the effect of scale economies,
• competition among firms forces them to pass on their lower costs to
consumers in the form of lower prices.
• Benefits for consumers in both countries (raises real income)
• Trade enables firms to produce for a larger market and at a higher
level of efficiency.
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The Gains from Intraindustry Trade
• The expansion of the market that occurs with trade ultimately leads
to an increase in the number of firms.
• This follows from the fact that exports costs are below the selling price, and
new firms are attracted into the market until excess profits are competed
away.
• In addition to (1) lower prices (higher real income)
• and the (2) potential expansion of production, another benefit from
intraindustry trade is that
• it (3) increases consumer choices.
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Trade and Geography
• Paul Krugman has stated that international trade is really about
geography and the decision every firm must make about the location
of its activities.
• For example, availability of labor or energy resources, or proximity to a
market or specialized input suppliers may determine a firm’s choices.
• Trade and geography are linked in two fundamental ways.
• First, a place such as a major city may pull in economic activity because it is a
large market.
• Second, a place may offer firms the opportunity to find critical inputs,
including skilled labor
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Lista desatualziada, considerer
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Geography, Transportation Costs, and Internal
Economics of Scale
• For most manufactured goods, it is not practical to produce
next to each market because there are economies of scale.
• Instead, car production tends to be concentrated in a few
areas, and the final product is shipped to the markets where
it is sold.
• Economics of scale x transportation costs
• Transportation costs and scale economies are characteristics
of manufacturing that help explain several patterns observed
in the global economy.
External Economies of Scale
• External economies of scale occur when firms become more
productive as the number of firms in the industry increases,
• but individual firms may or may not have an economic incentive to
increase in size.
• External economies may occur for several reasons.
• knowledge spillovers
• a deep labor market for specialized skills.
• a dense network of input suppliers.
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Trade and External Economies
• One of the essential features of geographical concentration is that it is self-
reinforcing.
• For example, the increased availability of high-quality inputs – more firms in the
same industry locating in the area – stronger pull for workers and input suppliers.
• One implication of these features is that small differences in initial
conditions may lead to large differences in outcome (head start).
• May turn into a permanent competitive advantage.
• For example: For example, during World War II, as jet engines were being developed
in Great Britain, the Allies decided to locate production in the United States on the
West Coast.
Industrial Policy
• The creation of Airbus is an example of governments using industrial
policies to explicitly direct economic activity.
• As the name and example imply, industrial policies are government policies
designed to create new industries or to support existing ones.
• Not surprisingly, industrial policies are controversial; so much so, that
recent international agreements limit the scope of action that countries
can take to support their industries.
• Industrial Policies and Market Failure
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Industrial Policy Tools
• All industrial policies share the same objective of channeling
resources to the targeted industry
• This can be accomplished in various ways, but the most obvious is to offer
direct subsidies
• This runs into the practical difficulty that Uruguay Round rules of
the WTO prohibit subsidies for competitive products.
• Nevertheless, the rules generally allow governments to subsidize
“precompetitive” activities such as research, and the distinction
between the two can be blurry at times.
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