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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

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

What factors does Paul Krugman identify that supported expanding international trade in the 1800s?

How does comparative advantage lead to gains from trade?

Review the numbers for Canada and Venezuela from Table 19.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.

a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.

b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are

willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this 鈥渁sk鈥� as the relative price or trade price of lumber.

c. Is the Canadian 鈥渁sk鈥� you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

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