BUS5 187 Lecture Notes - Lecture 12: New Trade Theory, Paul Krugman, Ethnocentrism
Does The Product Life Cycle Theory Hold?
•But, the globalization and integration of the world economy has made this
theory less valid today
the theory is ethnocentric
production today is dispersed globally
products today are introduced in multiple markets simultaneously
What Is New Trade Theory?
New trade theory suggests that the ability of firms to gain economies of
scale (unit cost reductions associated with a large scale of output) can have
important implications for international trade
Countries may specialize in the production and export of particular products
because in certain industries, the world market can only support a limited number
of firms
◦new trade theory emerged in the 1980s
◦Paul Krugman won the Nobel prize for his work in 2008
Through its impact on economies of scale, trade can increase the variety of
goods available to consumers and decrease the average cost of those goods
◦without trade, nations might not be able to produce those products where
economies of scale are important
◦with trade, markets are large enough to support the production necessary to
achieve economies of scale
◦so, trade is mutually beneficial because it allows for the specialization of
production, the realization of scale economies, and the production of a greater
variety of products at lower prices
In those industries when output required to attain economies of scale
represents a significant proportion of total world demand, the global market may
only be able to support a small number of enterprises
◦first-mover advantages - the economic and strategic advantages that accrue
to early entrants into an industry economies of scale
◦first movers can gain a scale based cost advantage that later entrants find
difficult to match
What Are The Implications Of
New Trade Theory For Nations?
•Nations may benefit from trade even when they do not differ in resource
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade. Countries may specialize in the production and export of particular products because in certain industries, the world market can only support a limited number of firms new trade theory emerged in the 1980s. Paul krugman won the nobel prize for his work in 2008. New trade theory for nations: nations may benefit from trade even when they do not differ in resource endowments or technology. Michael porter (1990) tried to explain why a nation achieves international success in a particular industry advantage identified four attributes that promote or impede the creation of competitive. Factor endowments - a nation"s position in factors of production necessary to compete in a given industry. Can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how)
