The rise of the intra-industry trade machines:
By Magister Ludi, Know Nothing Digest staff writer
Common sense dictates that when a country trades in a certain product, the country should either mostly import or export that particular product. There would be an export of some products in the country and an import of some other different products. This is considered inter-industry trade. This is the case for most trade between countries, however there is much additional trade in which a country both imports and exports very similar or even the very same products. These are often varieties of products that are such close substitute products that they are classified within the same industry, such as automobiles or perfumes or cosmetics or potato chips or soda or oil or chemicals and such. This is known as intra-industry trade (Pugel, 2016.)
Intra-industry trade is where economies specialize to take advantage of increasing returns, ignoring differences in regional endowments. This allows countries to specialize in a limited variety of production and exploit the advantages of economies of scale without reducing the variety of goods available on the market. This can be seen when Wal-Mart provides mass quantities of a particular set of brands of a particular selection of products because they are available at a large scale at a certain time in a certain region. The product selection varies by fluctuations in the suppling firms that Wal-Mart deals with. The supply chain of these supply firms react to differing factors in the various sectors of the various products that are utilized to produce the products that are produced by these individual firms. Country’s produce different products because of the cost reduction obtained by producing only a limited range of products (Krugman, 2006.) There is regional inefficiency created by the limited runs of the limited range of items produced. The demand for the products supplied shifts from time to time and region to region and firms must follow these trends to obtain maximum yield and profit. Trade policies change from country to country through internal and external forces, these regional policies directly affect what firms produce and when they are able to produce it. These are the developing reasons for Intra-industry trade. Predicting market demand is not dissimilar to predicting the weather and the market forecast dictates what products and firms will remain viable.
- Krugman, P, 2006, The rise of Intraindustry Trade, Princeton, https://www.princeton.edu/~pkrugman/Intraindustry.pdf
- Pugel, T., 2016, International Economics, 16thedition