Monopolistically competitive markets
and gains from trade
Introduction
The neo-classical models of international trade provide powerful tools to understand the gains from trade through international division of labour. An analysis of the common assumption these models rest on reflects they all assume perfect competition between the firms. However, in the reality, we can observe that some for industries, the competition on the market is seriously impaired. Hence, the analysis of the gains from trade can not be explained by these neo-classical models. New theories of trade have tried to understand the impact of trade liberalisation on such markets. Is competition on some markets impaired as a result of market fundamentals and if it is, can these markets make the benefit of trade liberalisation? If countries can partly solve market failure by opening up to trade on paper, are these gains from trade effectively observed in the real life? In this article, we will first try to analyse the reasons for a certain lack of competition, th effeciency problems it leads to and how trade liberalisation can temperate these problem. Then we will see to what extent the remedies have been observed in the real economic life.
1. Monopolistic competition and international trade.
The gains from trade in the case of monopolistically competition market have been pictured by Krugman. What do these gains consist in?
1.1 Internal economies of scale as a source of market failure
The neo-classical theories of trade, i.e. the Heckscher-Ohlin model, rest on the assumption that perfect competition rules the firms decisions. However, in the reality we can observe that the markets on which internal economies of scale occur present ...
... middle of paper ...
...ductive firms rather than an improvement of competition. Still, since the company have to face abroad competition, these two visions can be compatible. A limit to gains of trade on monopolistically competitive market we can point out is when a firm, instead of facing its new competitors fairly, practice dumping practices, which are prohibited by the WTO.
Word count: 1960
Bibliography
Part I
International economics : theory and policy, 5th Edition, Addison-Wesley, 2000, P. Krugman and R, Obstfeld (figure 1.1, 1.2, 1.3)
International economics, 3rd Edition, Macmillan, 1994, Sèodersten, Bo
Part II
International economics, 3rd Edition, Macmillan, 1994, Sèodersten, Bo (figure 2.1)
New evidence o the gains from trade in Review of World Economics, 142(4), 2006, R. Feenstra
General Agreement on Tariffs and Trade 1994, website of the World Trade Office www.wto.org
He then, states that the number of jobs lost barely even put a dent in the number of jobs produced by trade. Another important issue of the trade system is that the people who get rich from trade, keep getting richer while the poor stay poor. This is partially solved by protectionism (taxing imports), although it slows economic growth in the long run and protects some of the jobs that would be lost in the short run. To help understand the price of trade barriers, he explains this by stopping trade across the Mississippi River. This shows that the east side would then have to stop producing their goods and spend some of their time producing what the west side used to export. Although, there would be an increase in jobs, it would not be efficient because they are not using specialization to their full advantage. The author then moves on to the point that trade lowers the price of goods, due to it being cheaper to produce in other areas. He portrays this by showing why Nike can produce shoes in Vietnam instead of the United States. He further elaborates his point by proving that trade helps poor countries as
Bentley, J., & Ziegler, H. (2008). Trade and encounters a global perspective on the past. (4th ed., Vol. 1, pp. 182-401). New York: McGraw-Hill.
Few governments will argue that the exchange of goods and services across international borders is a bad thing. However, the degree to which an international trading system is open may come into contest with a state’s ability to protect its interests. Free trade is often portrayed in a good light, with focus placed on the material benefits. Theoretically, free trade enables a distribution of resources across state lines. A country’s workforce may become more productive as it specializes in products that it has a comparative advantage. Free trade minimizes the chance that a market will have a surplus of one product and not enough of another. Arguably, comparative specialization leads to efficiency and growth.
The trade protectionism has been a huge area of debate in recent years over the pros and cons to America. The growth of business since the recession is all about the supply and demand. In order for America to protect their industries they needed an avenue that would give their young industries time to develop, thus entered the idea of Trade Protectionism. What exactly is trade protectionism?
"Monopolies and Combinations in Restraint of Trade." U.S. Code Collection. N.p.: n.p., n.d. N. pag. Print. 28 Mar. 2014.
Krugman writes that in the decade preceding his article “Is Free Trade Passé?” international trade theory underwent radical change from the traditions of constant returns and perfect competition to include new models emphasizing increasing returns and imperfect competition (1987, p. 131). Comparative advantage is no longer accepted as a means to explain in totality what actually happens in trade, and extraneous factors indicate that free trade may not be in the best interest of individual nations. Krugman answers the question posed in the article title by saying that free trade it is not passé, but it is better used as a guiding principle rather than a standard rule. This paper will review the theories that challenge the assumptions of constant returns and perfect competition, as well as discuss the implications for classical trade optimism and trade policy and practice.
[15]. Andrei Shleifer and Lawrence H. Summers, 1990. Journal of Economics Perspectives, Vol. 4, No. 2, Spring 1990, pp. 19-33
...stinguish that a qualitatively new type of worldwide trade was developing. The illustration in United stated since the late of 1980 showed that “has less productive portions moved offshore which lead to a decrease in employment while maintaining higher value-added parts. Consequently, all the productivity has risen, while the tradable sector has increased employment” (Spence and Hlatshwayo,2011).
All nations can get the benefits of free trade by being specialized in producing goods they have a comparative advantage and then trade them with goods produced by other nations in the world. This is evidenced by comparative advantage theory. Trade depends on many factors, country's history, institution, size and. geographical position and many more. Also, the countries put trade barriers for the exchange of their goods and services with other nations in order to protect their own company from foreign competition, or to protect consumers from undesirable products, or sometimes it may be inadvertent.
Free trade is a form of economic policy which allows countries to import and export goods among each other with no government interference. In recent years there has been a general consensus in economist’s stance on free trade. They view free trade as an asset. Free trade allows for an abundance of goods with increased varieties and increased availability. The products become cheaper for consumers and no one company monopolizes an industry. The system of free trade has been highly controversial. While free trade benefits consumers it has the potential to hurt manufacturers and businesses thus creating a debate between supporters of free trade and those with antagonistic positions.
In order for international trade to work well, governments must allow the world market to determine how goods are sold, manufactured and traded for all to economically prosper. While all nations may have the capability to produce any goods or services needed by their population, it is not possible for all nations to have a comparative advantage for producing a good due to natural resources of the country or other available resources needed to produce a good or service. The example of trading among states comprising the United States is an example of how free trade works best without the interve...
Dornubusch, Rudiger. Macroeconomics. USA. McGraw-Hill Publishing Company. 1990.
Firstly, what should be noted here is that international trade has been providing different benefits for firms as they may expand in different new markets and raise productivity by adopting different approaches. Given that nowadays marketplace is more dynamic and characterized by an interdependent economy, the volume of international trade has grown substantially in recent years, reducing the barriers to international trade. However, after experiencing the economic crisis that took its toll in 2008 many countries adopted a different approach in terms of trade barriers by introducing higher tariffs in order to protect domestic firms from foreign competition (Hill). Secondly, in order to better understand the implications of the political arguments for trade it is essential to highlight the main instruments of trade policy (See appendix 1).
International trade is the growing share of global production and growth in trade is expected to outperform
Tussie, D., & Aggio, C. (n.d.). Economic and social impacts of trade liberalization. Retrieved from http://www.unctad.info/upload/TAB/docs/TechCooperation/fullreport-version14nov-p106-119.pdf