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Gains from specialization and learning

Consider the category of machinery, where the U.S. economy has considerable intra-industry trade. Machinery comes in many varieties, so the United States may be exporting machinery for manufacturing with wood, but importing machinery for photographic processing. The underlying reason why a country like the United States, Japan, or Germany produces one kind of machinery rather than another is usually not related to U.S., German, or Japanese firms and workers having generally higher or lower skills. It is just that, in working on very specific and particular products, firms in certain countries develop unique and different skills.

Specialization in the world economy can be very finely split. In fact, recent years have seen a trend in international trade called splitting up the value chain    . The value chain    describes how a good is produced in stages. As indicated in the beginning of the chapter, the production of the iPhone involves the design and engineering of the phone in the United States, parts supplied from Korea, the assembly of the parts in China, and the advertising and marketing done in the United States. Thanks in large part to improvements in communication technology, sharing information, and transportation, it has become easier to split up the value chain. Instead of production in a single large factory, all of these steps can be split up among different firms operating in different places and even different countries. Because firms split up the value chain, international trade often does not involve whole finished products like automobiles or refrigerators being traded between nations. Instead, it involves shipping more specialized goods like, say, automobile dashboards or the shelving that fits inside refrigerators. Intra-industry trade between similar countries produces economic gains because it allows workers and firms to learn and innovate on particular products—and often to focus on very particular parts of the value chain.

Visit this website for some interesting information about the assembly of the iPhone.

Economies of scale, competition, variety

A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. The concept of economies of scale    , as introduced in Cost and Industry Structure , means that as the scale of output goes up, average costs of production decline—at least up to a point. [link] illustrates economies of scale for a plant producing toaster ovens. The horizontal axis of the figure shows the quantity of production by a certain firm or at a certain manufacturing plant. The vertical axis measures the average cost of production. Production plant S produces a small level of output at 30 units and has an average cost of production of $30 per toaster oven. Plant M produces at a medium level of output at 50 units, and has an average cost of production of $20 per toaster oven. Plant L produces 150 units of output with an average cost of production of only $10 per toaster oven. Although plant V can produce 200 units of output, it still has the same unit cost as Plant L.

Questions & Answers

what is trade
Aqsa Reply
exchange of goods and services
Uzair
how do u understand real income
lubega Reply
Income that earned by factor of production is called National income
Piyush
what is trade balance
Aqsa
anyone to shade more light on elasticity demand?
Ashraf Reply
How are the diminishing marginal utility and negatively sloped demand curve related
Siva Reply
what are the types of trade cycle
riziwani Reply
no saving and tax always subtract from NDPmp
Piyush Reply
these are not part of national income
Piyush
how so?
SUB
but it was given
Keyrene
tax always subtracted from?
Keyrene
tax are always subtracted from what?
Asante
keynesian consumption function explain and function
Abdullah Reply
is saving and direct taxes part of income method?
Keyrene
no
Piyush
then where should it belong?
Keyrene
what is the rules of macroeconomics
Amadou Reply
Q1. Discuss the comparative analysis of different economic systems which are prevalent around the world. Give detail examples of different countries where different economic systems are in operation. Also discuss how these countries solve the three basic economic problems of what, how and for whom to produce.
Sami Reply
as interest rates increase what happens to planned investment and aggregate expenditures
Patrick Reply
what is applied economic
Micheal Reply
what is the Demand curve
Patrick
how does one analyze a market where both demand and supply shift
Reymark Reply
explain and justify the effect of the event to the demand and supply for direction then apply the elasticity concepts for extent , support with diagrams
samantha
objective of macro economic
saroj Reply
give the characteristics of good money?
Chok Reply
convenience, flexibility,......
BENIJAMBO
How consumer satisfy of her wants.
Javid
make scale preference method
BENIJAMBO
suppose that there is a positive aggregate demand shock. what graph most accurately show how this would affect the aggregate demand-aggregate supply model?
Shielyn Reply
ppf and ad/as
jax
PPF , AD/AS
Shubham
Every Work must be done properly based on its Feasibility Studies duly prepared.
Pundato
why is it desirable for a country to have a large gdp? give an example of something that would raise gdp and yet be undesirable
JAWAD

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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