Chapter 5 Modern International Trade Theory

1. Chapter 5 Modern International Trade Theory 制作人：刘继森教授

2. Section I The emergence and development of modern international trade theory • 1. The background • the rise of transnational corporations • economic globalization • the multilateral trading system improvement and development • challenged the traditional theory of international trade

3. theoretical assumptions has changed greatly • comparative advantage • factor endowments • based on a series of stringent assumptions • If these assumptions changed, they could lead to completely different conclusions.

4. 2. The development track • Leontief questioned the H-O model • Linde and Vernon made new trade basis from a dynamic point of view different from the comparative advantage of • Krugman, new trade theory. • Neoclassical general equilibrium analysis of trade theory of comparative advantage based on "international trade theory model of perfect competition," • new trade theory can be called "international trade is not perfect competition model."

5. Emergence of new trade theory has two main sources: • First, as the world's economic and trade development, the traditional trade theory has not convincingly explained the phenomenon of many important international trade; • Second, the development of the theory of industrial organization provides a solid theoretical basis for the emergence of new trade theory

6. 3.the relations between modern international trade theory with traditional trade theory • Difference between the two theories: • (1) explained different phenomenon of trade, the former explained intra-industry trade between developed countries, while the latter focuses on inter-industry trade between the developed and developing countries

7. (2) theoretical basis is different, the former based on economies of scale and imperfect competition,the latter based on constant returns to scale and perfect competition. • Therefore, the two are not substitutes, but complementary relationship, they shared a rich and developed system of international trade theory.

8. Section II economies of scale and international trade • 1. the basic principle of economies of scale • Economies of scale: With the expansion of production scale and production increased, the output per unit of factor input will increase ,the average cost of products will decline. Microeconomics named it "increasing returns to scale" , also known as economies of scale.

9. Constant returns to scale: in the best of the production scale, the average cost of the product has reached the lowest point, and to some extent, the average cost will not decline because of production increases. This phase is called the "constant returns to scale."

10. Decreasing returns to scale: when the scale of production continued to expand, the average cost of production did not continued to decline because that the scale is too large and decrease the efficiency of management and co-operation. This phenomenon is called "decreasing returns to scale“.

11. long-term average costs and economies of scale cost LAC decline constant rise Q O Economies of scale decreasing returns to scale

12. Internal economies of scale: the average cost of firms decline with the expansion of production scale of its own. • External economies of scale: As the amount of firms increases and the relative concentration of enterprises so that the transaction costs in the information gathering, product sales and other aspects decline.

13. 2.external economies of scale and international trade P P S1’ MC1 S1 MC2 AC1 S2 AC2 P1 P2 LRAC D1 D2 Q q O Q1 Q2 q1=q2 O

14. Price drop from P1 to P2, trade expansion and average cost decline, the industry has a competitive advantage in the international market ,companies have active to export sports shoes, so international trade begins.

15. The distribution of trade benefits: a single company can get economic profits at short-term equilibrium; but long-term economic profit equal to zero. • Short-term gains, long-term nothing to lose.

16. For consumers, long-term prices decreased, consumption increased, consumer surplus increased. Society as a whole was a net benefit of trade.

17. 3.the internal economies of scale and international trade • (A) monopolistic competitor with internal economies of scale • Its characteristics are: large-scale enterprises, the products have different demand curves slope downward to the right.

18. A profit will attract firms go into the industry, the price decline, and profit reduce and economic profit is zero. • A loss will let some manufacturers exit, the price rise, loss reduce until there is no economic and profit is zero.

19. Under the long-term competitive conditions, the company's AC line tangent to the demand curve, the product price is equal to its average cost, profit is zero.

20. P P1=AC1 AC MC D MR Q O Q1

21. (B) monopolistic competitor participated in international trade P P1=AC1 P2 AC AC MC D2 MR2 D1 MR1 O Q1 Q

22. Before participating in trading, the company is facing domestic demand curve, according to the principle of profit maximization ,MR1 = MC, the production capacity of manufacturers is Q1.

23. After participating in trade, due to foreign demand, so the demand curve moves from D1 outside the D2, MR1 move outside the MR2, AC1 has dropped to AC2, the shaded area shall be short-term equilibrium, firms maximize their profits.

24. According to microeconomic theory, monopolistic competition had short-term profit, with the entry or exit of firms in long-term , the competition will lead to economic profits disappear, companies can only get the normal profit.

25. P,C P1=LAC1 P3=LAC3 LAC D3 MC D1 MR1 MR3 O Q Q1 Q3

26. Short-term impact of open trade: business production increased, the average cost reduced, firms had short-term profits. Product prices may fall, consumer surplus increases. But the short-term prices may rise, resulting in decreased domestic consumption.

27. long-term impact of open trade : enterprise production increased, the average cost and product prices fell and the two are equal, economic profit of enterprises is zero . Domestic consumption and consumer surplus increased.

28. (C) internal economies of scale, monopolistic competitors, intra- industry trade

29. C,P C,P The U.S. JAPAN 2.0 2.0 1.5 LAC LAC 0 0 Truck Q 100 200 Truck Q 100 Export to the U.S.

30. JAPAN The U.S. C,P C,P 2.0 2.0 1.5 LAC LAC 0 0 100 200 Car Q 100 Car Q Export to Japan

31. Before trade between the United States and Japan, two countries produce some trucks and some cars: Japanese produce 100 trucks and 100 cars, the U.S. also do so. • Costs topped 20 thousand U.S. dollars because market size is small .

32. After trading, enterprises can bring the cost down by expanding the production scale. • For example, Japan will expand production scale of truck to 200 units, prices fell to 15 thousand U.S. dollars; U.S. expand car production to 200 vehicles, prices fell to 15 thousand U.S. dollars.

33. Two-way trade is based on economies of scale, rather than technical differences or the allocation of resources generated by different comparative advantages.

34. Section III Imperfect Competition and International Trade

35. 1. Imperfect competition in • international trade • Perfect competition: free market competition with the absence of any interference and obstacles . • Perfect competition must meet the following conditions.(3-4)

36. Monopoly: the production and sale of a product entirely controlled by a vendor. Monopolist is a price maker rather than price taker.

37. Imperfect competition: imperfect competition is that market conditions included both monopoly and competition factors. Or that is market status between perfect competition and monopoly. Imperfect competitive market structure vary widely, there is not a fixed and unified theoretical framework to describe it. But there are two forms of specific market theory of imperfect competition often became the object of study: monopolistic competition and oligopoly.

38. 2. Price discrimination and international trade • Price discrimination refers that although product sold is the same, but in different markets or to charge different consumers different prices. Such price discrimination of international trade often referred to "dumping", the income is brought by "dumping" to the enterprise export encouragement , it can explain the trade cause of imperfect competition firms.

39. price discrimination must meet three necessary conditions :☆ imperfect competition☆ market segmentation☆ the flexibility of demand curve that different manufacturers faced on the market is different (assuming in the foreign market, the price elasticity of demand is greater than that of the national market).

40. Dumping definition: the price of goods sold to foreign markets less than the "normal price" is referred to as dumping. "Normal price" determined by the following three ways: • Exporting country's domestic market prices; • The price of export to third countries;

41. Structural prices :the total of production costs, marketing costs, management and administration costs and reasonable profits. • The importance of these three ways determined the "normal price" is decreasing, we can use the second approach under the condition only the first method does not apply, when the second does not apply, we can use third. Dumping is a price discrimination.

42. P，MR P，MR MC，MR MC Pd Pf MCE E Ef Ed MRd+f Dd Df MRd MRf Q Qf Qd Profits Maximization and Dumping

43. When the output is Q, the marginal cost is MCE = QE. In accordance with the requirements of profits maximization, companies in every market should be marginal revenue equals marginal cost, then the horizontal line along the MCE in (a) and (b) find the Ed and Ef (QE = QfEf = QdEd), which two points are the production of the two market equilibrium. To maximize the total output Q profits, domestic sales of Qd, the foreign sales of Qf, Q = Qd + Qf.

44. The price of domestic and foreign market is respectively Pd and Pf, and Pd> Pf. That foreign sales price is lower than the domestic prices is dumping. Marginal of dumping is the Pd-Pf.

45. Section IV intra-industry trade • 1. the definition of intra-industry trade and calculation • Intra-industry trade is defined that in the same period, firms import and export the products of the same industry.

46. 60 years of the 20th century, economics began to pay attention with the intra-industry trade phenomenon. • In 1960, Verdoorm analyzed the impact of the "Benelux alliance" to three countries in a paper, and found that the three countries specialization is in the same industry, between different branches.

47. In 1966, after analyzing the trade situation of the Member States of the European Community Balassa found that the majority of the trade growth of European countries is in the international standard classification of goods trade group, not in goods between the groups.

48. Grubel & Lloyd are the first economists who analyzed the intra-industry trade phenomenon. In 1975, they published “Intra-Industry Trade," it made a more systematic explanation to intra-industry.

49. We usually use intra-industry trade index (index of intra-industrial trade, IIT) to measure a degree of intra-industry trade.

50. 2.intra-industry trade is the result of economies of scale and imperfect competition • (1) intra-industry trade of the same products • G & L thought that this is caused by the costs of transport, storage, sales and packaging.