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Chapter 4
The New Trade Theory
Learning target
After learning this chapter, you should be able to:
Understand how economies of scale underlie international trade
Explain the impact of external economies of scale on trade patterns and gains from trade
Understand intra-industry trade patterns resulting from internal economies of scale and product differentiation
Recognize the new gains from intra-industry trade
Use the tools of new trade theory to analyze some practical problems of China’s trade with other countries
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Main content
The New Trade Pattern: Intra-Industry Trade
The New Basis of Trade: Economies of Scale
External Economies of Scale and International Trade
Internal Economies of Scale and International Trade
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1. The New Trade Pattern
(1)The concept of intra-industry trade
Intra-industry trade refers to exchanging similar products in the same industry
Two countries import and export products belonging to the same sector or category mutually
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1. The New Trade Pattern
(2)The measurement and facts of intra-industry trade
The intra-industry trade index
The value of the intra-industry trade index ranges from 0 to 1, and the higher the level of intra-industry trade, the closer the index is to 1
A widespread form of intra-industry trade cannot be explained by traditional trade theory
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Krugman was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to New Trade Theory and New Economic Geography
The Prize Committee cited Krugman's work explaining the patterns of international trade and the geographic distribution of economic activity by examining the effects of economies of scale and consumer preferences for diverse goods and services
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1. The New Trade Pattern
2. The New Basis of Trade
(1)The theory of economies of scale
Returns to scale describe what happens to returns as the scale of production increases
Constant Returns to Scale
Increasing Returns to Scale
Decreasing Returns to Scale
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2. The New Basis of Trade
(2)External economies