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Unit 7 : Causes of Emergence and Measurement of Intra-Industry Trade and Its Impact on Developing Economics
Self-Assessment Notes
1. Choose the correct option
(i) Suppose Canada exports cars and imports furniture. This is an example of
(a) Grubel-Lloyd trade.
(b) Unbalanced trade, since cars are more valuable than furniture.
(c) Intra industry trade.
(d) Inter industry trade.
(ii) Which of the following are true statements about intra-industry trade?
(a) Low values on the Grubel-Lloyd index are associated with high levels of intra industry
trade.
(b) The majority of U.S. and European trade is intra industry trade.
(c) Intra industry trade is especially common in agricultural sectors.
(d) All of the above.
(iii) If an industry is characterized by External Economies of Scale
(a) Firm costs decline as the industry grows in size.
(b) Firm costs decline as firms increase in size.
(c) The market is likely to be served by an oligopoly of firms.
(d) Monopolistic competition will follow.
(iv) Consider a monopolistic market, such as the market for laptop computers. If a producer
leaves the market,
(a) Laptop prices will fall.
(b) Laptop prices will rise and output per firm will increase.
(c) Laptop prices will rise and output per firm will fall.
(d) Output per firm will decrease as firms exploit market power.
(v) Intra-industry trade benefits customers
(a) In both countries, since prices fall and the number of varieties available to consumers
increases.
(b) In the larger country, since prices fall. Consumers in the smaller country are hurt by
rising prices.
(c) In both countries, since the effects of rising prices is offset by the benefit of an increased
choice of varieties.
(d) In the smaller country, since prices fall. Consumers in the larger country are hurt by
rising prices.
7.8 Summary
Over the last decade or so there has been a reappraisal by some economists of the ability of
traditional trade theory to explain relatively recent developments in the pattern of world trade.
The 'new' views have largely focused on the economies of the DCs, newly industrialized countries
(NICs), East Asian NICs and developing countries at higher stages of development.
These countries are rapidly dismantling their highly protectionist trade regimes often initiated
by major multilateral lending agencies, including the IMF and the World Bank. There has been
constant effort to determine from a theoretical standpoint whether or not there is anything in
this "new" theory for small developing economies.
The new theories pay particular attention to two features of imperfect world markets, viz: (1)
economies of scale; (2) external economies. These motives include the advantage of large scale
production, technological advancement and innovation.
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