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Chapter 33: Q.25 (page 804)

Why might intra-industry trade seem surprising from the point of view of comparative advantage?

Short Answer

Expert verified

Because similar products are traded.

Step by step solution

01

Step 1. Introduction 

Intra-industry trade refers to the trade of similar types of products between different countries. Comparative advantage refers to the ability to produce a product at a lower opportunity cost.

02

Step 2. Explanation 

Comparative advantage helps in explaining the general patterns of trade such as how low-productivity regions are able to export to high productivity regions. Theoretically, comparative advantage suggests that trade should take place between countries with high differences in opportunity cost.

However, in practice, a large portion of international trade takes place between similar advanced economies. So, from the perspective of the comparative advantage, this might be surprising.

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Most popular questions from this chapter

Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of \(10 per phone and South Korea can produce 50 million mobile phones at \)5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?

What are the two main sources of economic gains from intra-industry trade?

How does comparative advantage lead to gains from trade?

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

Are differences in geography behind the differences in absolute advantages?
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