In previous models, we assumed that if relative prices were the same in autarky, two countries...

In previous models, we assumed that if relative prices were the same in autarky, two countries would not trade. Why might countries with similar technology and similar factor endowments actually trade (as they do in real life) and why might this bring benefits to consumers/the overall economy? you don’t have to draw out the model, just explain the intuition

Expert Solution

- Countries with similar technology and similar factor endowments actually trade for economies of scale and product differentiation.

- In contending for the observational significance of the scale economies component of this worldview, Krugman refered to two appearing oddities in world exchange designs when seen through a factor endowments focal point:

o First, quite a bit of world exchange is between nations with comparable factor endowments.

o Second, an enormous some portion of exchange is intra-industry in character – that is, it comprises of two-path exchange comparative products.

- Essentially, this worldview explicitly rejected that factor enrichment contrasts are significant for understanding exchange among the rich nations of the

- North, for which rather it goes to the new exchange hypothesis. What's more, the transcendence of intra-industry exchange is additionally seen as a riddle, since this is seen as exchange merchandise of comparable factor power.

- As the current worldview recommends, scale economies and product differentiation likely could be significant for exchange, when appropriately imagined and estimated, intra-industry exchange is rather one of the important conductors of factor administration exchange for nations

- Exchange inside the North is clarified by economies of scale and product differentiation. This worldview explicitly dismisses an significant part for gift contrasts in clarifying exchange inside the North

- We place that endowments matter for exchange if two measures are met. (1) Net factor administration exchange is efficiently identified with blessing contrasts; and (2) The economic extents of this net factor administration exchange are huge. Our observational work shows that the two models are met

Rahul Sunny answered 1 year ago

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