Post on 02-Jan-2016
Chapter 5
Modern IT Theories
New Development of IT (after War II) The relationship of modern IT theories Intra-industry trade Economies of Scale & Imperfect
Competition Dynamic theories of IT
Chapter 5
New Development of IT(after war II)
Rise of Intra-industry Trade Increase in Trade among In
dustrialized Countries
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Rise of Intra-industry Tradeexchange products which belong to the same sector
Inter-sector Trade
China
USA
Cloth Rice
Cloth Rice
Intra-sector Trade
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Increase in Trade among Industrialized Countries According to classical trade
theory,the difference of countries lead to IT;the bigger the difference, the more trade possibility
After 60s,the “North-North Trade” exceeded the “North-South Trade”
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North-North Trade
020406080
100
Exports Imports Total
USAROW
From the 60s to the 80s, trade between industrialized countries rose from 45 to 55% of world trade.
Relationship
Assumptions
of H-O
Pure
Competition
Unchanged
Technology
Imperfect competition
Economies of scale
Technology Transformatio
n
Product Cycle Theory
Imperfect competition
Integration Theories about Integration
Free Trade Government Interference
Trade Policy Trade Policy & Trade & Trade BarriersBarriers
Constant return of Scale
Economies of Scale
Intra-industry trade
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Intra-industry Trade Definition
Trade in which a country exports and imports in the same industry
In contrast to inter-industry trade. Measurement Explaining intra-industry trade Pattern and gains of IIT Summary for IIT
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Measurement Economists use the Grubel-Lloyd (GL) index or Intra-industry Trade ( IIT ) index to measure the degree of intra-industry trade in an industry.
X and M respectively represent the export and import value in an industry (or the same kind of products).
: 1 .j j j j j jj
jj j j j j
X M X M X MIITGL
TT X M X M
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GL index (or IIT index)
X M X M X M
IIT=1 IIT=0 IIT=0.5
IIT index falls between 0 and 1
If a country only export or import this kind of product, IIT= 0, i.e. no intra-industry trade.
If IIT>0, it means the country export and import this kind of products at the same time (intra-industry trade).
The larger IIT index is, the more popular the intra-industry trade is. When X=M, IIT=1.
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GL index of a country
The intra-industry trade index of a country is:
n
iii
n
iii
i
MX
MXB
1
11
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IIT index (or GL index)of selected countries
unit:%
1988-91 1992-95 96-2000
High and increasing IITCzech Republic n.a 66.3 77.4
Slovak Republic n.a 69.8 76
Mexico 62.5 74.4 73.4
Hungary 54.9 64.3 72.1
Germany 67.1 72 72
United States 63.5 65.3 68.5
Poland 56.4 61.7 62.6
Portugal 52.4 56.3 61.3
High and stable IITFrance 75.9 77.6 77.5
Canada 73.5 74.7 76.2
Austria 71.8 74.3 74.2
UK 70.1 73.1 73.7
Switzerland 69.8 71.8 72
Belgium-Luxembourg 77.6 77.7 71.4
Spain 68.2 72.1 71.2
Netherlands 69.2 70 68.9
Sweden 64.2 64.6 66.6
Denmark 61.6 63.4 64.8
Italy 61.6 64 64.7
Ireland 58.6 57.2 54.6
Finland 53.8 53.2 53.9
Low and increasing IITKorea 41.4 50.6 57.5
Japan 37.6 40.8 47.6
Low and stable IITNew Zealand 37.2 38.4 40.6
Turkey 36.7 36.2 40
Norway 40 37.5 37.1
Greece 42.8 39.5 36.9
Australia 28.6 29.8 29.8
Iceland 19 19.1 20.1
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Increasing importance of intra-industry trade
Intra-industry trade (2-digits)
0
1
1961 1966 1971 1976 1981 1986 1991 1996
Japan
USA
Germany
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Explaining intra-industry trade
love for variety Internationalization of production
Intra-firm trade Reciprocal dumping (economies of
scale) Other explanations
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Love for varieties
Belgium 5 million laborers10,000 varieties
produced, 10,000consumed
Netherlands 7 million laborers14,000 varieties
produced, 14,000consumed
Belgium 5 million laborers10,000 varieties
produced, 24,000consumed
Netherlands 7 million laborers14,000 varieties
produced, 24,000consumed
a. Autarky
b. International trade10,000 varieties;
7/12 th of production
14,000 varieties;5/12 th of production
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Love for varieties
Variety 1A
Variety NA
Variety 2B
Variety 1B
Variety 2A
Variety NB
Consumer country A Consumer country B
.
.
....
Exports from B to A
Exports from A to B
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Intermediate 1A
Intermediate NA
Intermediate 2B
Intermediate 1B
Intermediate 2A
Intermediate NB
Producers country A Producers country B
.
.
....
Exports from B to A
Exports from A to B
Consumers country A Consumers country B
Internationalization of production
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Intra-firm trade INTRA - FIRM TRADE: trade within the same
firm but located in different countries. Example: Toyota ships cars or car parts from
Toyota Japan to Toyota USA. Still its value is recorded as import of the USA. The US consumers or the government do not make choice about value or quantity of this import. This decision is based on the cost calculation made internally by TOYOTA (“global firm”).
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Reasons for Intra-firm trade
Cheap transportation Fast, internet - based information. Intra-firm pricing (“transfer pricing”). Development of own distributorships
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ExampleA computer ordered by you at Dell through e-mail are put into production in four hours in Taiwan and shipped by air to the USA in 12 hours. A computer built to your specification is on your desk in less then three days. The Taiwanese export is an intra-firm trade.Dell imports your computer to the USA in few parts which are easy to assemble at the USA Dell plant.
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ExampleThe parts are low priced so the import tariffs on them are very low. The computer is put together in few minutes and Dell “adds value” at home by basically repackaging it before shipping to you.
The result is that you have cheap product.
Dell has high profits because they “add value” in the USA, so Dell stock sells like hot cakes.
Taiwan has jobs.
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Example Low cost intermediate goods - buying
through foreign subsidiary may be cheaper. Mexican firms gets assembly parts from Japan and sends TV’s to the US under NAFTA rules.
Own distributors lowers the markup of independent firms.
The transfer price - firms price assembly parts internally below cost to pay lower tariffs and taxes and add value at the fully owned assembly subsidiary.
Chapter 5
Reciprocal Dumping Example
Two countries: USA & Japan Two goods: car & truck Identical technology 、 factor endowmen
ts and demand preference. The basic reasons for this kind of
IIT is economies of scale, we will discuss this topic in details later.
PC
QC
LACc
2
PT
QT
LACT
2
USA & Japan
PC
LACC
2
QC
1.5
Export to Japan
PT
QT
LACT
2
1.5
Export to USA
Trade
Autarky
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Other explanations No Puzzle: Pure Categorical
Aggregation As an empirical matter, IIT does fall
with disaggregation. Seasonal trade, Entreport
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Pattern and Gains of IIT Horizontal IIT vs. Vertical IIT
HIIT: intra-industry trade in horizontally differentiated products (products differentiated by attributes)
VIIT: intra-industry trade in vertically differentiated products (products differentiated by quality)
Gains Economies of scale lead to low costs and low price. Consumers enjoy differentiated products.