Question

Empirical evidence suggests that the Linder Effect is stronger in manufactured versus non-manufactured goods. This may be explained by the fact that non-manufactured goods are less differentiated and more standardised than manufactured goods.

Clearly indicate if the statement is true or false and briefly explain your answer

Answer 1

The statement is true.
Linder proposed that trade in manufactured goods was primarily determined by domestic demand conditions which meant that a country will export products for which there exists a large and active domestic market. The simple reason is that the production for the domestic market must be large enough for firms to realize scale economies. The resulting lower costs would help to penetrate foreign markets. The most promising and open markets for exports will be found in countries whose income levels and tastes are generally comparable to those of the exporting country. Since consumer tastes depend on income levels, the types of products produced in a country are a function of the level of per capita income in the country. In other words, countries produce goods that respond primarily to the demands and tastes of their consumers but part of the output will be exported to other countries where receptive markets exist. Linder's theory is applicable only with respect to the trade in differentiated manufactured goods in which consumer tastes and scale economies are deemed to be particularly important. Trade in raw material or agricultural products can be adequately explained by the traditional theory with its emphasis on the supply of productive factors, including climate and natural resources.