International Economic Relations and Intra Industry Trade - Essay Example

Intra Industry Trade Intra-industry trade refers to the exchange of the same kind of goods belonging to the same industry. This terminology is usually used in international trade, where similar types of goods and services are imported and exported. This type of trade is practiced in automobile industry, foodstuffs and the electronics industry which mostly deals with computers. It is normally carried out for purposes of economies of scale, which is the main advantage derived from international trade. This theory has difficulties in its applicability because of challenges experienced while introducing economies of scale into formal models of trade. Economies of scale results from external activities undertaken by the firm. The traditional way of doing this is to assume that increasing returns are wholly external to the firm. That is, all economies of scale realized by the firm results from activities in which the firms have no control over (Murthy 25). This means that activities undertaken by the firm do not contribute to any savings on large-scale operations. External economies are too vague and unmeasurable to qualify as an explanation of patterns of trade. Given the economies of scale, each country undertakes to produce only a limited number of products in each industry that is under operation. This pattern of operation is termed as intraindustrial specialization, where each country produces what is essential for offer on other markets (Murthy 46). This makes the implications for the trade pattern straightforward, meaning that each and every nation will be a net exporter in industries in which it possesses a comparative advantage. That is, it will specialize in producing those goods that it can cheaply produce and export or sell them to countries that have limited resources to produce similar goods. This enables the country to realize gains from exporting those goods and thus increases its revenue and overall profitability. Due to intraindustry specialization, each country is capable of importing some products even in some industries in which it is a net exporter. Similarly, a country is capable of exporting some products even in some industries in which it is a net importer. This implies that there will be a presence of both intraindustry as well as interindustry trade, thus enabling the given country to reap both the benefits of comparative advantage and economies of scale (Murthy 55). This article widely explains the intra-industry theory as it allows a country to reap benefits from both exports and imports by partly engaging in each of these international trade aspects that improve the overall economic conditions. The more similar the nations are in their endowment in factors of production, the less different their difference is in their industrial structures and, therefore, their trade will have an intraindustry characteristic making the economies of scale more (Murthy 58). A shortcoming related to the theory is that it does not explain what becomes of a country where differences in quality of the products produced matter and affects the prices charged to the goods by the country of origin. The theoretical scheme becomes more complicated as it must be now explained as to why the goods within an industry can be sold at different price tags ,and also as to why prices differ though the goods are produced in exactly the same conditions and using similar factors of production including labor, raw materials and machinery (Murthy 75). For instance, the vertical differentiation scheme proposed by earlier researchers suggested that differences in price tags have to be located in differences in production functions, causing to differences in quality of the products. The researchers assume that a higher quality translates to a better quality and larger capital input. The researchers involved in coming up with this theory did some explanatory research in explaining the empirical evidence puzzles posed by manufacturing trade among the industrial countries. The article adequately explains why similar countries conduct trade so much, and as to why most of their trade is a two way exchange of similar and identical products or services (Murthy 81). The theory similarly gives some exciting new insights relating to the impacts of trade on the welfare and income distribution among citizens of the trading countries. Even though the liberalization of trade may theoretically make everyone better off or improve every citizens standards of living, the movement of income distribution I most of the time enough to the make sure that the real income of scarce factors of production falls. However, if increasing returns to scale are present, this should not be the case. Technological innovations have happened throughout and speedily improved over the recent age. New technologies discovery is integrated with the old before replacing them. These discoveries in new technologies have led to intense and continuous competition among firms and countries at different level of operations. The competition is healthy or unhealthy depending on how its adoption style. Healthy competition leads to better and improved products plus better living standards among the citizens of the specific country (Murthy 86). The intraindustry trade theory suggests that trade in manufactured goods among industrial countries is a benign object, that is not likely to cause adjustment problems and hence easier to liberalize. The technological competition theory is different from this assumption implied by intraindustry theory. Technological competition is seen in various aspects of firms’ operations. It is conducted in form of huge investment in research and development or through the learning curve aspect. Its applicability in the real world is possible. Firms that invest in research and development activities surpass those firms that seat back and lay down idle their tools regarding research work and its importance in scaling the organisations performance to the next level. Research and development activities keep accompany ahead of its competitors. It gets the latest and most valuable information regarding the markets and new products developments, which it uses to develop new products and keep in line with the competitors (Murthy 106). Though a country invests immensely in research activities at the beginning and may operate at a loss, the benefits and impacts of this are huge later in the company’s cycle compared to a firm that did not undertake research activities. The amount of research undertaken by a firm determines their position in a later competition in the actual or exact product market (Murthy 126). Another applicable way of this theory is through learning by doing. The technological competition would then take the procedure and system of willingness and readiness to accept low earnings in the initial stages in order for the firm and its employees to move faster down the learning curve. Using this approach of technological competition, the qualitative character of the results would undoubtedly be almost the same. Learning by doing involves the employees doing the work using new technologies and gaining hands on experience. The firm does not invest in research and development activities. The employees learn usage of new technological techniques in their day-to-day activities and continuously become experts in its application (Murthy 181). The advantage gained through this method is reduced investment in research and development activities while at the same time resulting into similar outcome. However, learning by doing mighty seem slow and patience is key with the firm doing it. The article is insufficient as it highly simplifies the applicability of the technological competition theory. In order to derive the schedules indicated in the graph in the article, it requires a deep and extensive analysis that became well understood recently, through the input of various authors in the sector. The model of deriving the home and foreign reactions to research and development activities needs to be worked backward; first we derive the after or post research and development equilibrium conditions on the levels of research and development expenditure. Then using the outcome of this examination, we derive the relationship of expected profits to research and development, which finally gives us the chance to come up with the reaction functions (Murthy 248). Thus, behind the simplicity of the figure, there is huge complexity, which means that this article does do a good job in applying the theory in a real world setting. This article has drawn out the two newest approaches to conducting trade amongst industrial countries. This is based on the recent emergence of a literature, which applies concepts from industrial organization theory to international trade. Between the two approaches of conducting trade, the intraindustry trade theory is comparatively a finished or final product, as it deals with exchange of similar final products between countries. On the other hand, the theory of technological competition is still in a rough or raw state. This is because it involves competition between or amongst firms in the initial stages of product development. Research and development activities are conducted at the very beginning of any product life cycle and thus the theory is in its raw state (Murthy 306). The two theories give us basis for thinking and brainstorming about issues, including vital policy issues, which at least cannot be tackled by traditional theories that took a different approach in dealing with the items discussed. Work cited Murthy, Gautam. International Economic Relations. New Delhi: Kalpaz Publications, 2008. Print. Read More