Question

Part II. Short Essay eC048500 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? Page 1 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

Answer to first question is provided :

1) Intra-industry trade refers to the situation where exchange of similar products occur which belong to the same industry , the same types of goods or services are both imported and exported .

Intra-industry trade is based on transportation costs , seasonal trade , product differentiation . Such trade may occur if countries experience different climates during different parts of a year . If a finished product that is traded is climate specific such as seasonal fruits then climatic differences among countries causes high production in one country in one part of the year and vice versa . Differentiation in cloth material , designs etc causes exchange of same product ( cloth ) . Transportation cost might be different for raw materials in different countries . A country might have easy access to sea and can produce sea fish in large quantities , on the other hand another country may have huge fresh water resources and can produce fresh water fish . Both country end up exchanging fish of different types .