New Trade Theories: Economies of Scale, Product Differentiation, and Intra-industry Trade

Trade models based on comparative advantage are due to differences in productivities or factor endowments that explain inter-industry trade, which represents trade in products in different industries, like aircraft and apparel, or wheat and oil. However, most of the merchandise trade among industrialized countries is in the form of intra-industry trade, which is trade in similar products, like cars for cars, or computers for computers. These countries have the same relative factor endowments, and the traded products have the same factor intensities, so the pattern of trade cannot be explained by the H-O model.

A new set of models known as New Trade ...

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