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Chapter 20: Q 23. (page 494)

Does intra-industry trade contradict the theory of

comparative advantage?

Short Answer

Expert verified

This is not right that intra-industry trade contradicts the theory of comparative advantage.

Step by step solution

01

Step 1. Definition

Comparative advantage is defined as the capability of an economy to produce a good or service at a reduced opportunity cost as compared to its trading partners.

Intra-industry trade is defined as the situation where countries interchange or exchange alike products which relate to the same industry.

02

Step 2. Explanation

No, this is not true. Intra-industry trade does not contradict the theory of comparative advantage. Trade in similar kind of products help in broadening the concept of comparative advantage through higher specialization and economies of scale acheived from splitting the value chain.

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Most popular questions from this chapter

Why might intra-industry trade seem surprising

from the point of view of comparative advantage?

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 is the absolute advantage? What is comparative advantage?

Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain.

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.
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