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Chapter 19: Q 23. (page 462)

Does intra-industry trade contradict the theory of

comparative advantage?

Short Answer

Expert verified

No, it doesn't contradict.

Step by step solution

01

Step 1. Definition

Intra-industry trade is the exchange of alike products belonging to the same industry.

The ability to produce a good or service at a relatively lower opportunity cost than others is known as comparative advantage.

02

Step 2. Explanation

No, intra- industry trade doesn鈥檛 contradict the comparative advantage theory because both deal with different areas of trade. Like in Intra industry trade we deal with similar or identical products and in comparative advantage, we deal with different products and skills. So intra- industry trade only adds up or reinforces the theory and allows additional skills to the comparative advantage theory.

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Most popular questions from this chapter

True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. 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.

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?

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?

Can a nation鈥檚 comparative advantage change over

time? What factors would make it change?
See all solutions

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