Question

What are the benefits to similar economies from intra-industry trade? Select all that apply.

1.Focus on one part of a value chain

2.High degree of specialization

3.Domestic monopolies

4.Economies of scale

Answer 1

Intra-industry trade is a part of total foreign trade whose share has the increasing trend as the international competitiveness level of certain country become higher and more similar in relation to its main foreign trade partners.

1.Focus on one part of a value chain:In recent years we have seen a trend in international trade called splitting up the value chain.The value chain describes how a good is produced in stages. Instead of production in a single large factory, all of these steps can be split up among different firms operating in different places and different countries. Because firms split up the value chain, international trade often does not involve whole finished products like automobiles being traded between nations. Instead, it involves shipping more specialized goods like, say, automobile dashboards. Intra-industry trade between similar countries produces economic gains because it allows workers and firms to learn and innovate on particular products,and often to focus on very particular parts of the value chain.

2.Economies of scale:The concept of economies of scale, means that as the scale of output goes up, average costs of production decline.The concept of economies of scale becomes especially relevant to international trade when it enables one or two large producers to supply the entire country. For example, a single large automobile factory could probably supply all the cars purchased in a smaller economy in a given year. However, if a country has only one or two large factories producing cars, and no international trade, then consumers in that country would have relatively little choice between kinds of cars. Little or no competition will exist between different car manufacturers.

International trade provides a way to combine the lower average production costs that come from economies of scale and still have competition and variety for consumers. Large automobile factories in different countries can make and sell their products around the world.