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By the end of this section, you will be able to:

  • Identify at least two advantages of intra-industry trading
  • Explain the relationship between economies of scale and intra-industry trade

Absolute and comparative advantages explain a great deal about patterns of global trade. For example, they help to explain the patterns noted at the start of this chapter, like why you may be eating fresh fruit from Chile or Mexico, or why lower productivity regions like Africa and Latin America are able to sell a substantial proportion of their exports to higher productivity regions like the European Union and North America. Comparative advantage, however, at least at first glance, does not seem especially well-suited to explain other common patterns of international trade.

The prevalence of intra-industry trade between similar economies

The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Roughly half of all world trade involves shipping goods between the fairly similar high-income economies of the United States, Canada, the European Union, Japan, Mexico, and China (see [link] ).

(Source: https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf)
Where u.s. exports go and u.s. imports originate (2015)
Country U.S. Exports Go to ... U.S. Imports Come from ...
European Union 19.0% 21.0%
Canada 22.0% 14.0%
Japan   4.0%   6.0%
Mexico 15.0% 13.0%
China 8.0% 20.0%

Moreover, the theory of comparative advantage suggests that each economy should specialize to a degree in certain products, and then exchange those products. A high proportion of trade, however, is intra-industry trade    —that is, trade of goods within the same industry from one country to another. For example, the United States produces and exports autos and imports autos. [link] shows some of the largest categories of U.S. exports and imports. In all of these categories, the United States is both a substantial exporter and a substantial importer of goods from the same industry. In 2014, according to the Bureau of Economic Analysis, the United States exported $159 billion worth of autos, and imported $327 billion worth of autos. About 60% of U.S. trade and 60% of European trade is intra-industry trade.

(Source: http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm)
Some intra-industry u.s. exports and imports in 2014
Some U.S. Exports Quantity of Exports ($ billions) Quantity of Imports ($ billions)
Autos $146 $327
Food and beverages $144 $126
Capital goods $550 $551
Consumer goods $199 $558
Industrial supplies  $507  $665
Other transportation  $45  $55

Why do similar high-income economies engage in intra-industry trade? What can be the economic benefit of having workers of fairly similar skills making cars, computers, machinery and other products which are then shipped across the oceans to and from the United States, the European Union, and Japan? There are two reasons: (1) The division of labor    leads to learning, innovation, and unique skills; and (2) economies of scale.

Questions & Answers

but if I may ask what brings this poverty in existence and how can such actions be deminish in our generation
Philemon Reply
Poverty comes from many factors, ranging from very low income for the households sector (purchasing power is low), basic needs such as safe drinking water, lack of sustainable development goals (roads, agriculture, technology, power, etc), business sector is poor, etc
Hadji
Such action can be diminished by effectively and efficiently using the four (4) factors of production. Land, Labor , Capital and Technology.
Hadji
Poverty - Increase in the cost of living without subsequent increase in the amount of minimum wage. Poverty can be reduced extremely if the minimum wage equals or equals more than the cost of living.
harmony
land labour capital and organisation factors of production
divya
what are positive and normative statements
Alethia Reply
p
Mohd
positive is realistic normative is imaginary
Prashant
give basic idea about India's national income
Maloy Reply
what are the sources of recessions and booms
Zweli Reply
A few years ago, Ama paid $500 to put together a record collection. Today she sold her albums at a garage sale for $100. how does the same affect GDP?
teresa Reply
It saves time its creates more employment
Gold Reply
Scarcity means human wants exceeds the resources needed to satisfy them 1. Limited resources 2. Numerous human wants
Gold
Scarcity means shortage!!!
Lewis
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Moha
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Andy
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Lewis
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Naeemuddin
What is mean by small open economy ?
Gecho
1. there is specialization of labor 2. skilled labor 3. increase in productivity
Amma Reply
1 to make right choices 2. to handle scarcity 3. make informed decisions
Amma
what is the difference between demand and quantity demanded?
Mursal Reply
Demand is affected by other factors while price is held constant Quantity demanded is affected by price while other factors are held constant
Gold
discuss advantages and disadvantages of international trade.
Ram Reply
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ISRAR
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ISRAR
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ISRAR
What are the reasons of demand pull inflation
GIRIDHARI Reply
the reasons behind pull inflation are high rate of interest
Ahmed
yes
M-H-S
in other hand when demand of specific commodity is high and its supply is low there will be inflation of price
Ahmed
Thank you
GIRIDHARI
you are welcome
Ahmed
thank you
Mohamed
some hot stuff from Ahmed
JOSHUA
what is barter system
twinkel Reply
a system in which goods are exchanged for other goods
daniel
Barter system is said to be the process whereby goods are being exchange for goods
Asamoah
a system in which money have not play any role
Ramu
goods and services are exchanged .. problem is finding equitable or agreeable value for the exchange of the goods or services.. I teach maths privately and love home made cake, I decided 4 home made cakes was worth an hour of private maths 😁
jax
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twinkel
thanks a lot to everyone .
ISRAR
bater system is a system of trade where by goods are exchange for goods which exist before existence of what we call money
ADEGOKE
accounts in balance of trade
Kamuyu Reply
What is fiscal policy and intrest rates
Attah Reply
fiscal policy is the use of govt. revenue collection and expenditure to influence the economy.
twinkel
it is government spending, taxing, regulatory, borrowing powers on the economy.
JOSHUA
income and expenditure
Bittu Reply
Income is revenue generated from a business while expenditure is money spent
Gold
For short income is gain while expenditure is loss.
Lewis
what is the difference b/w income per capita and income
Moha
What is aggregate
Patrice
aggregate means total
konglan
Macro economics : it is the study of all aggregate of all economic activities of an economic as whole.
Rajat Reply

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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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