Answer to Question #166656 in Economics for Manyela

Question

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?

[25 Marks]

Answer 1

The new theory implies that economies of scale lead to specialization of different regions of the planet. Due to cheaper production, large enterprises are displacing small ones, which leads to the formation of oligopolies and monopolies, as larger companies begin to use their size and resources to absorb smaller companies. Sometimes size allows companies to underestimate the relative advantage of smaller companies and get rid of a competitor as early as possible. As a result, production may not be concentrated in the most efficient place for this. This suggests that a protectionist policy is a way out of this problem.However, this policy creates conditions not only for the growth of new companies, but also the environment for the formation of a local monopolist who is not ready to compete in the international market. Thus, the state has to more subtly influence the players in order to protect its interests, and sometimes it is powerless. Another problem is addiction. This specialization leads to the fact that all market participants are dependent on the stability and security of supplies. Serious breakdown or disruption in supply logistics can lead to a trade collapse. Political or social upheaval in a large, specialized region can disrupt a significant part of the industry. Which will lead to shocks in other regions. Such interpenetration spreads not only good but also problems.