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GRA 6649 International Economics Lecture 8 Associate professor Per Botolf Maurseth Per.B.Maurseth@bi.no. Lecture plan. Outline. Taking stock Trade between rich countries Intra industry trade Increasing returns and monopolistic competition. Outline – rest of the course.

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GRA 6649International Economics Lecture 8Associate professor Per Botolf MaursethPer.B.Maurseth@bi.no

outline
Outline
  • Taking stock
    • Trade betweenrichcountries
    • Intraindustry trade
    • Increasingreturns and monopolisticcompetition
outline rest of the course
Outline – rest of the course
  • Lecture 8: Increasing returns and monopolistic competition
  • Lecture 9: Increasing returns and monopolistic competition - continued
  • Lecture 10: Economic Geography
  • Lecture 11: Economic Geography
  • Lecture 12: The gravity equation
  • Lecture 13: Open
why is there so much trade between us and other rich countries
Why is there so much trade between US and other rich countries?
  • Factor content is similar? HOS cannot predict this trade.
  • Much trade is intra-industry, i.e. trade within commodity groups.
  • Standard measure of IIT: The Grubel-Lloyd index
  • Gi = 2 min (EXPi, IMPi)/ (EXPi+ IMPi)
  • or
  • Gi = 1 – |(EXPi- IMPi)|/ (EXPi+ IMPi)
  • for sector i.
  • A related measure is the net export ratio
  • Bi = (EXPi- IMPi)/ (EXPi+ IMPi)
  • since Gi = 1 - |Bi|
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G = 1 – i |(EXPi- IMPi)|/i (EXPi+ IMPi)

  • The index can be applied to a country’s trade with all partners, or bilaterally. It will normally lower in the latter case. For example, assume that Norway exports good X to Germany and imports it from France. If IIT is calculated for Norway’s total trade in X (with all partners), trade with Germany and France would, taken together, represent intra-industry trade, whereas in bilateral IIT measures it would not.
slide7

Some stylised facts on IIT:

  • It varies across sectors, and is higher for skill-intensive sectors. It is not positively correlated with measures of economies of scale in production (some results show a negative correlation).
  • It is higher in the trade of rich countries, and between rich countries.
  • It is higher between countries at similar income levels.
  • It falls with the distance between countries.
  • For many EU countries, more than 60% of trade is IIT.
  • Norway has low IIT, around 1/3 (based on 8-digit HS).
  • Oligopoly/concentration: Mixed results as to whether IIT is higher in sectors with high concentration.
increasing returns and monopolistic competition
Increasing returns and monopolistic competition
  • Increasing returns: cannot have perfect competition
  • Monopolistic competition
    • Many varieties within a commodity group
    • Consumers have preferences for more commodities (an approximation – could be many different consumers as well).
    • Increasing returns: AC>MC
    • Free entry ensures zero profits
monopolistic competition
Monopolistic competition
  • Must put emphasis on consumers.
  • This lecture: Dixit-Stiglitz preferences.
  • Autarky market
  • Next time:
    • Trade
    • Trade with transportation costs – home market effect
literature
Literature:
  • Lecture notes by Karen Helene Ulltveit-Moe.
  • Lecture notes
  • Krugman (1994) ch. 1 and 2
  • Feenstra (2004) ch. 5