Many trading partners trade the same goods and services with one another. The U.S. exports automobiles...

Many trading partners trade the same goods and services with one another. The U.S. exports automobiles to Europe and Europe exports automobiles to the United States. In fact, that's true for food, appliances, computers and many other goods. Does intra-industry trade contradict the theory of comparative advantage? Why or why not?

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Expert Solution

Intra-industry trade doesn't contradict the theory of comparative advantage. When we study the theory of comparative advantage, we simplify the situation by taking only two goods that are produced in the trading countries and to make the constrast sharp, the two goods are usually from different industries (e.g., machinery and food).

In reality, however, there are multiple variants of the goods being produced in the same industry. Automobile industry, for instance, produces thousands of variants of vehicles. Even within cars, there are hundreds of varieties. While the US may be exporting cars that are big and spacious, it may be importing designer and muscular cars from Europe. We can analyse the imports and exports of goods belonging to the same industry on the same lines for other industries too.

There are reasons why the US is better at producting the cars it exports, and Europe better at the ones that are imported into the US. Those reasons, and the resulting comparative advantage each region / country enjoys, leads to international trade.

Rahul Sunny answered 1 year ago

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