Question

Under the factor endowment model, the main gain from trade is found in resource reallocation. Under the “monopolistic competition, economies of scale,” theory, there are other gains as well. What are these other gains?

Answer 1

A factor endowment represents how many resources a country has at its disposal to be itilized for manufacturing - resources such as labor, land, money and entreprenurship. countries with large or diverse factor endowments are typically more wealthy and able to produce more goods than countries with small factor endowments.

Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.

THESE ARE THE OTHER GAINS:

1. New Import Varieties Available To Consumers.

This gains can be measured as new goods in a CES utility function for consumers.

2. Enhanced Efficiency As More Productive Firms Begin Exporting And Less Productive Firms Exit.

This gain formally analogous to the producer gain from new goods, with a constant-elasticity transformation curve for the economy.

3. Reduced Markups Charged By Firms DueTo Import Competition.

This gain can be measured using a translog expenditure function for consumers, which in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups.