Essay on Business

1294 Words May 1st, 2012 6 Pages
The New International Trade

The “New” international trade refers to trade issues that are related to imperfect markets.

The Infant Industry Argument

The Argument:

In some industries, new firms cannot compete with established firms because they don’t have enough experience. According to this argument, the government should use import barriers to protect these infant industries.

The Learning Curve

Describes the relationship between historical output and current average cost of production.
Also called dynamic increasing returns-to-scale, learning-by-doing.
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The underlying economic assumption is that some production processes cannot be completely “learned” without actually producing. There are “tricks of the trade” that come
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Example: Silicon Valley & its pool of computer experts. There may be “spillovers”, i.e., breakthroughs or subtle improvements are spread from firm-to-firm easily (the larger the industry, the more spillovers)
The cost of using specialized labor may fall due to higher local availability.
Increases in “public capital” through R&D

External EOS give an additional reason for countries to specialize.

Consider two identical countries producing software and financial services. Suppose there are external EOS in both industries. Assume the consumers in each country have the same tastes, and that they like a mixture of software and financial services.
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It pays to specialize as long as you like variety.
Some have argued that there are no longer natural determinants of C.A.--EOS is then still a motive for trade.
This implies that historical accident may play a role in current trade patterns (Swiss watches). There is hysteresis in trade patterns.

Are external eos a reason to try to create comparative advantage?

The gov't may be able to play a role in coordinating firms to enter in the same industry, reducing everyone's costs compared to foreign firms, and thereby creating CA.

Is there any reason to desire a CA in one industry rather than another?

"High wages" is not a good reason, because if the wages reflect MP, then the workers could earn the same thing in other industries.
"Rents" is a good reason, only if the rents come from

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