1. how can international trade theory explain intra-industry trade? 2. why might

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1. how can international trade theory explain intra-industry trade? 2. why might we except intra-industry trade based on scale economies to be less politically controversial than intra-industry trade based on comparative advangate? 3. This question asks you to analyze the effects of removal of a tariff on imported oranges. The following table summarizes the situations in the orange market with and without the tariff. The first column describes the situation with a $4.00-per-bushel tariff on oranges. The second column represents the situation after the tariff is removed. You may assume that transportation costs are zero and that the supply and demand curves are straight lines. With $4.00 Tariff With Free Trade World Price of Oranges ($/Bushel) $12.00 $12.00 Tariff Per Bushel ($/Bushel) $4.00 $0.00 Domestic Price of Oranges ($/Bushel) $16.00 $12.00 Oranges consumed domestically 24 8 (million bushels/year) Oranges produced domestically 8 6 (million bushels/year) a. Illustrate the effects of removal of the tariff. Label the free-trade and tariff equilibria in terms of consumption, domestic production, imports, and domestic and world prices. b. Estimate the amount domestic consumers gain from removal of the tariff. Show and explain your work. c. Estimate the amount of the net effect on the country’s welfare from removal of the tariff. Show and explain your work. d. In this case, would the optimal import tariff on oranges be negative, zero, or positive? Why? Under what assumptions is the “optimal” tariff really optimal?

Explanation / Answer

Q.1 INtra industry trade refers to trading similar products belonging to same industry.

We have two important models that explain international trade.: David Ricardo and Hecksher-Ohlin model. Both the models have xplained why international trade occurs. These theories have fomed comparative advantage as basis of international trade. It is argued that these models do not consider intra trade as specialization has been considered in these theories. But an economist, Donald Davis believed that both the Heckscher–Ohlin and Ricardian models were still relevant in explaining intra-industry trade. Donald developed a model named Heckscher-Ohlin-Ricardo model, which showed that even with constant returns to scale that intra-industry trade could still occur under the traditional setting. This model explained that countries of identical factor endowments would still trade due to differences in technology, as this would encourage specialisation and therefore trade, in exactly the same matter that was set out in the Ricardian model.

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