ECON 401 Assignment 2, version E

1. (a) Explain the new trade theory. What is the role of economies of scale in this theory?

The new trade theory specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries the world market can support only a limited number of firms. So a country’s pattern of trade may be a reflection of the ability of firms in that nation to capture first-mover advantages.

Two important points: • Impact on economies of scale, trade can increase the variety of good available to consumers and decrease the average cost of those goods. • When output required attaining economies of scale representing a huge portion of the world demand, world trade in certain products may be dominated by countries whose firms were first movers in their production. i.e. Boeing

The role of economies of scale is the ability to spread fixed costs over a large volume and the ability to high-volume producers to utilize specialized employees and equipment that are more productive than less specialized employees and equipment. Economies of scale are a major source of cost reduction in many industries.

(b) Discuss the implications of the new trade theory. The new trade theory was designed to account for the ratio of trade to GDP has increased, trade has become more concentrated among industrialized countries and trade among industrialized countries is largely intra-industry trade.

2. What is outsourcing? Outsourcing is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. List and discuss the types of policies, according to Blinder, that must be changed in order to achieve the