Question 1

What is intra-industry trade? Is intra-industry trade consistent with the predictions of the Heckscher-Ohlin theory? Explain, and relate your discussion to evidence about trade between industrialized countries and developing counties, and about trade among industrialized countries.

Accepted Answer

The answer of What is intra-industry trade? Is intra-industry trade...

Question 2

If substantial internal scale economies exist, production of a commodity tends to be concentrated in a few large facilities in a few countries.

Accepted Answer

Substantial internal scale economies refer to cost advantages that large facilities have over smaller ones due to their size and production volume. This tends to lead to concentration of production in a few large facilities in a few countries, as they are able to produce at a lower cost than smaller competitors.

Question 3

Explain the concept of scale economies. Explain the difference between internal and external scale economies. What pattern of trade do we expect to see in industries with substantial external scale economies?

Accepted Answer

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Question 4

A large amount of intra-industry trade is not compatible with the comparative-advantage theory of trade.

Accepted Answer

Intra-industry trade occurs when countries simultaneously import and export similar goods within the same industry. This type of trade is often driven by economies of scale, product differentiation, and technology transfer, rather than differences in factor endowments and relative efficiency, which are the main drivers of comparative advantage theory. Therefore, a large amount of intra-industry trade can be inconsistent with the predictions of the theory.

Question 5

Scale economies help explain why products are produced in a limited number of varieties in a country.

Accepted Answer

Scale economies refer to the cost advantages that companies can achieve by increasing production levels. These economies of scale allow companies to produce more units at a lower unit cost. However, producing a broader range of products can lead to higher costs due to the need for specialized machinery, skilled labor, and management. As a result, companies often limit the number of varieties they produce in order to take advantage of scale economies and lower costs. Thus, scale economies help explain why products are produced in a limited number of varieties in a country.

Question 6

A firm is said to operate with constant returns to scale if its input cost increases by four times when its output is doubled.

Accepted Answer

A firm operates with constant returns to scale if its input costs increase proportionately less than the increase in output. In this case, the input cost increases by four times when output is doubled, which means it is exhibiting decreasing returns to scale.

Question 7

Under monopolistic competition, new firms are barred from entering the industry in the long run.

Accepted Answer

In monopolistic competition, new firms can enter the industry in the long run. However, existing firms have some degree of market power due to product differentiation.

Question 8

According to the gravity model, countries that share a common language trade more with each other.

Accepted Answer

The gravity model suggests that countries that share a common language, culture, or history tend to trade more with each other due to reduced barriers to communication and cultural understanding, as well as increased trust and familiarity.

Question 9

"In the shift from no trade to free trade, the monopolistic-competition model can predict which specific varieties of products will be produced by which countries, and the models based on substantial scale economies can predict which countries will be the major production locations for a product." Are these claims correct? Explain briefly.

Accepted Answer

The answer of "In the shift from no trade to...

Question 10

Exploiting substantial scale economies is an explanation of why some industries come to be categorized as monopolistically competitive.

Accepted Answer

Exploiting substantial scale economies is more characteristic of oligopolies or monopolies, where a few firms or a single firm can produce at lower average costs due to large-scale production. Monopolistically competitive markets are characterized by many firms producing differentiated products, not by scale economies.

Question 11

Consider that in country A, there are some models of cars available in the luxury segment produced by the domestic companies. Some more models are available in the same segment in country B as well. Explain with the help of suitable figures how the consumers in both the countries gain if these countries engage in free trade.

Accepted Answer

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Question 12

Studies using the gravity model have found that countries that have a common currency trade more with each other.

Accepted Answer

The gravity model predicts that countries that share a common currency will trade more with each other due to lower transaction costs and reduced exchange rate uncertainty. Empirical studies have generally found support for this prediction.

Question 13

Intra-industry trade in differentiated products is negligible between countries that are similar in their general production capabilities.

Accepted Answer

Intra-industry trade in differentiated products can still occur between countries with similar production capabilities as they may differentiate their products through branding, packaging, quality, and other factors.

Question 14

A significant gain from trade in an oligopolistic market results from the increase in the number of product varieties that trade brings.

Accepted Answer

The answer of A significant gain from trade in an...

Question 15

Over time, intra-industry trade has become significantly smaller as a percentage of overall trade.

Accepted Answer

Intra-industry trade has actually increased over time as economies have become more integrated through globalization and trade agreements.

Question 16

Analysis using the gravity model shows that countries that have a higher degree of government corruption trade more with other countries.

Accepted Answer

The gravity model of international trade generally predicts that countries trade more with larger economies and those geographically closer to them, rather than with countries based on the level of government corruption. High levels of corruption can actually deter international trade due to increased costs, risks, and uncertainties.

Question 17

In an oligopoly market, firms vigorously compete with each other by selling different varieties of the same product.

Accepted Answer

In an oligopoly market, firms may compete on various fronts such as price, product differentiation, and marketing, but the competition is not always vigorous due to the small number of firms and the potential for collusion or strategic behavior.

Question 18

Carefully explain how, and under what conditions, an increase in foreign markets available to the United States computer producers would lead to an increase in economic well-being for consumers of computers in the United States.

Accepted Answer

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Question 19

In intra-industry trade, an exporting firm may be forced to sell its product at a lower price than in the absence of trade.

Accepted Answer

Intra-industry trade often involves similar or identical products being traded between countries, leading to increased competition and potentially lower prices for exporting firms.

Quiz 6: Scale Economies, Imperfect Competition, and Trade