Answer to Question #170487 in Macroeconomics for jj

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

Solution:

The new trade theory assumes that countries that are identical in every respect can benefit from trade in the presence of economies of scale. However, it is not always differences between countries that simulate trade but so many other factors. The new trade theory cannot predict which country would export which good. Also, countries that are identical in all aspects would have no natural incentive to trade since there will be no price difference between countries. These issues can be enhanced by ensuring that the production process is flawless and robust and carrying out a proper market analysis to determine what each country is good at producing.

The new trade theory may lead to an accelerated growth in globalization, which means that developing economies or poor countries will struggle to develop specific products since they lack the necessary skills and production efficiency enjoyed by developed countries. It can also be impacted by network effects. It can also result in trade inefficiencies in the long run. Sustainability, technology, and trade will also be impacted by the new trade theory.