Question

Part II. Short Essay 1. Discuss at least three reasons why we might expect countries to engage in intra-industry trade. 2. What would the Linder theory suggest about the prospects of developing countries in exporting goods to developed countries? Do you think that this is a realistic suggestion? Why or why not? 3. Distinguish between the external return to scale and internal return to scale. How does the new trade theory of economic returns to scale differ from the traditional trade theories like Ricardian model, and Heckscher-Ohlin model? 4. What is the Rybczynski theorem? How does theorem predict changes in factors usage in production and change in trading volume if there is an influx of immigrant?

Answer 1

1. Intra industry trade means the trade of goods between two countries which belongs to the same industry. We expect countries to engage in intra industry trade due to the following benefits

• Advantages of specialisation

By producing only a specific commodity the country gains from specialisation and learning. Therefore they can increase the production of that particular commodity and they can import others needed for the production purposes.

• Reduced production costs

When the country concentrates in the production of a particular product then over a time period the cost of production seems to decline.

• Availability of a wide range of products.

The consumers will now get access to a variety of products as a result of the intra industry trade.

2. Linder theory suggests that a developing countries should do trade with the other developing country. Not with a developed country. That is the trade should be taking place with the countries that have similar income and demand and production patterns.

This suggestion is not realistic. This is because there are instances where the countries with similar demand for certain products are not involved in the production of that particular product but are heavily relying on the imports.

3. Internal returns to scale are the benefits that comes within the firm or a company as a result of the production process

External returns on the other hand are the benefits that all other firms or companies receive as a result of the production process.

The new trade theory of economic returns to scale explained that the trade is possible between the countries that are having similarities among the factors of production. The classical models couldn't explain this.

4. According to this theorem, the production of that industry will increase which uses intensively the abundant resources available in the country. While the output of other industries will decrease.

If there is an influx of immigrants, then the proportion of labour will increase. This will increase the production and trade of labour intensive goods.