Question

Comparative advantage explains interindustry trade in di?erent goods between countries. How do economists explain intraindustry trade, that is, trade in the same industry between countries?Why might people in the United States want to buy German cars, and Germans want to buy cars from the United States?

Answer 1

Intra industry trade is the import and export of the goods and services producecd by the same industry at the same time. Intra industry trade increases the customer base in both the countries and also the cost of production decreases. The reasons behind Intra industry trade are division of labor and economies of scale.

For example : US produces one kind of cars and Germans produce another kind of cars. The cars produced in Germany have certain unique features in which German cars specialize and these features are not possessed by the cars in US. At the same time US cars have certain unique features which the US cars specialize in and these features are not possessed by German cars.

Firms in different countries in the same industry have unique skills and they have a expertise in that. If we split up the value chain then different parts of a good are manufactured in different countries in which they specialize and then they are assembled into one.

Example:

I Phone is designed and engineered in US, its parts are manufactured in Korea, it is assembled in China and its marketing is done in US.

Due to intra industry trade, the countries can develop their skills and innovate and specialize in certain products.