Answer to Question #170339 in Macroeconomics for micheal

Question

Question Three

The New trade theory suggests that the ability of firms to gain economies of scale has shown significant implications for international trade. Trade is mutually beneficial because it allows for the specialisation of production in specific locations where final products are produced.

Critique the new international trade theory propositions and ways in which this situation would be improved? What are the major problems this arrangement poses to the generation and movement of raw materials and finished products?

Answer 1

The new trade theory implies that the government is supposed to concentrate on promoting new enterprises and the expansion of crucial domestic industries. However, the most vital idea of international trade theory is a Ricardian model which focuses on the comparative advantage that suggests that countries should specialize in manufacturing what they produce best. For example in Japan's 1950s, the car industry received vast government support to boost its productivity as the major manufacturing industry in Japan.

The major problems with the new trade theory are that less developed countries may have sufficient natural resources but poor conditions for production and export of resources, such as skills, labor, and technology, therefore starting a new market may plunge industries with a lower efficiency into a recession. Nevertheless, companies embarking on a slump may be of low productivity and high environmental expenditure leading to poor performance and low income. Additionally, small countries' productivity profit may deteriorate due to business relocation while boosting the developed nations' economy. However, new trade theory can result in the reallocation of resources and the profits transformation and market share to farms with high productivity, which may impose excessive resource monopoly and hence loss of efficiency in the entire market.

The possible ways of improving new trade theory-associated problems include active involvement of underdeveloped countries in the global division of labor and raise the level of openness worldwide, which will enhance industry productivity and facilitate local economic development. Furthermore, countries can still grow the level of productivity in businesses and even across all sectors through trade and opening up under the restriction that the productivity of particular firms remains constant.