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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

who describe economic
yao Reply
thediminishingarginalutility
Stanley Reply
mean
yao
pls I'm a home economic student and went I was in my formal school I was doing biology so wen I got she 2 and I went a different school and that school they don't do biology what they do is economics and I don't understand it cos I didn't learn from form one so I will need ur help in this please
Hawa Reply
what help u need
Fatema
I don't understand it I tried to learn from form one but still don't understand
Hawa
jxt follow the notes well try solving question under it
Nana
important of economics
Benita Reply
what is supply chain
Jos Reply
what is financial management? And why is it necessary in business ?
Fatema Reply
it is the managing of all transactions that take place in any business and if not managed properly it could create debts and destroy the business
Asive
What is demand?
Annonymous Reply
why is degree important in economics
Ebunoluwa Reply
important of enocomic
Adu Reply
what is division of labour
Dennis Reply
division of labour can be defined as the separation of task to individuals in any economic system to specialize on it.
Ahmad
what is demand curve
Victoria Reply
demand curve is a downward sloping economic graph that shows the relationship between the price of product and the quantity of the product demanded.
Ahmad
What is demand
Frank Reply
It refers to the quantity of a commodity purchased in the market at a price and at a point of time.
Basanta
refers to amount of commodities a consumer is willing and able to buy at particular price within a period of time
Clifford
It is the ability and willingness a customer buys a product or service at a particular price, place and time while other things remaining constant or the same
kum
In which case is opportunity cost is zero
Francis Reply
where no alternative is available
Bhartendu
who is the father of economic
Omar Reply
Adam Smith
Suraj
ok
Tony
Adam Smith
Francis
Adam smith
Opana
Adam Smith
Basanta
What is monopoly
Mauthoor Reply
it an economic situation where one individual controls the essential commodities or value product for maximum profit
James
monopoly is a market situation in which there is only one producer of a good or service which has no close substitutes
eliano
is where only one person is solely the price taker
Francis

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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