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Chapter 33: Q. 23. (page 804)

Does intra-industry trade contradict the theory of comparative advantage?

Short Answer

Expert verified

Intra-industry trade do not contradict the theory of comparative advantage.

Step by step solution

01

Step 1. Meaning of intra-industry trade.

It is a term used when referring to the situation whereby entities in different countries but operating in the same industry specialize in the same commodity and become partners in international trade.

02

Step 2. Meaning of comparative advantage.

It is an economy's ability to produce a particular good or services at a lower opportunity cost than its trading partners.

03

Step 3. Intra-industry trade between similar economics do not contradict the theory of comparative advantage. Instead, they help to broaden the concept.

Generally, in intra-industry trade the level of worker productivity is not determined by climate or geography, rather it is determined by how firms engage in specific learning about specialize products, including taking advantage of economics scale. Whereas, comparative advantage can be dynamic i.e. it can evolve and change over time as new skills are developed as the value chain is split up in new ways.

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Most popular questions from this chapter

In Exercise 33.31, is there an 鈥渁sk鈥� where Venezuelans may say 鈥渘o thank you鈥� to trading with Canada?

France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.

a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.

b. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.

c. Identify which country has the comparative advantage.

d. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?

Look at Table 33.9. Is there a range of trades for which there will be no gains?

In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell?

What is intra-industry trade?
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