The basic definition of international trade is the exchange of items or commodities between countries without considering the nation boundary. The country is able to export a product when the product industry has grown completely and the production is far more than the demand of the home country. Import activity is done by purchasing certain product from other country to meet the demand of the nation about certain product. Economies of scale determine the import and export activity. Trading is the cause for organizations to focus on cost efficiency. Another point of view for organizations to think about trade is it expands the industry boundary without any limit. The industry can expand its business activity and the output to export. If an organization is producing a product in large quantity, there is a phenomenon that its cost will reduce and it is call economies of scale.
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Example: if the fixed cost to produce product A is 5000/-, the variable cost is 4/ unit. The lesser the company will produce the higher will be the cost. And the higher the quantity is produced the fixed cost will be divided more on the large number of units produced.
Figure Import & Export mechanism
Economies of scale are of two types, one is external and one is internal economies of scale.
Internal economies of scale are due to the technological advancement in the firm. The firm is cost efficient due to technological change at a certain level of output. The external economies of scale are achieved by the help of third party. In this case the manufacturing companies took help for its business activities as it will increase the cost of the product if the company is doing it by its way. After outsourcing the activity to third party, the firm has managed to be cost efficient. The external economies of scale mean the cost efficiency due to the involvement of third party in term of technical or commercial support. In this case, the firm takes the services like training of the labour, technological help and all factors which can reduce the cost. In this case the economies of scale are internal for the industry and external for the firm.
The important thing about economies of scale is that the countries with little differences in term of resources and technology are gaining the efficiency and becoming the part of intra-trade industry. As, world is a global village, the economies of scale explain the phenomenon of intra- industry trade in which countries are trading almost similar products with minor differentiation with each other.
Economies of scale mean production in large quantity. If a country produces a certain product in large quantity it can lower the cost as the cost of the product is divided into two parts, variable and fixed cost. The greater the firms production capability, the larger the economies of scale and intra-industry trade. International trade theory explains the pattern for international trading between the countries around the globe. Intra-industry trade is more suitable for monopolistic competition than oligopoly. In monopolistic competition there is only one major player of the industry who holds the share of the market and price of the product. In monopolistic competition the firm produces in a large quantity which reduces the cost of the product. And in oligopoly many players have the share of the industry and price control power.
According to Ohlin theory of trade, the trading between the countries is due to the lack of resources. The countries trade to utilize the resources and fulfil the need of the resources, because none of the country has enormous resources. The countries have to fulfil the demand of the resources and for that they need to import it from another country. The modern trade theory revolves around three factors which are technology, competitive structure, and scale of production (Robert, 2010).
Competitive structure is related to the competitive advantage over the competitors in term of resources. These resources can be technical, cost efficiency or the product differentiation. The drivers of the economy are technology and economies of scale. Now day’s technology is playing the most important role in the economy as the cost efficient and effective of the factors of production depends on it. Technology is the factor which can either make the unit cost so high or the unit cost can be a minimum.
Heckscher-Ohlin model of trade revolve around the economies of scale as the as it is the most important factor considered for trading. As, international trade theory explains the benefits of trading activities in any shape of resources (Robert, 2010). The basic benefit for internationally trading is to provide the nations a better living standard with lower price. Ohlin theory focused more on the economies of scale as trading, competitive edge depends on the cost of the product. Technology can be helpful in lowering the cost but economies of scale helps the firms not only expand their resources and capacity but also produce in large quantity which will lower the fixed cost of the production.
In the nut shell economies of scale tends to increase the chance of the trading, as the purpose of trading is to provide better living standards to nations. Ohlin theory of trade focused on the 3 factors technology, competitive structure, and scale of production. Economies of scale are the most effective tool in term of lowering the cost of the product.
Explain how intra- industry trade might be expanded via formation of regional trading agreements and custom unions. Are these international trading arrangements always trade creating?
Trading is considered to be the most effective way to share the resources in term of commodities among countries. Economists have given a new concept to the world, as a global village. Economist believes that with this concept the world will utilize the resources in a standard way, and the living standard of the people will be same as there will be no hurdle for trading. The term intra-industry trade is used for international trading in which the countries import and export similar commodities with each other. This trading is done on the basis of cost efficiency, and the expertise of the resources. According to the new concept of trade, every country should focus on the resources it has and should get an edge over its competitors in the utilization of that resource.
In intra- industry trade, regional trading agreements and custom unions are playing a vital role. There are two types of countries in the world, developed countries and under developed countries. In the new concept of the world trading, the developed countries will share the resources and their expertise with under develop countries to provide the same kind of living standards to the whole world. The trade agreements is been done in between different countries in order to expand the import and export. These agreements mainly focused on the conditions of trading between the countries. As, the trading should be balanced in between the countries, none of the country can only import goods or none of the country can only export goods. The trading should be in equilibrium. The trading agreements are reducing the national and political boundaries among countries.
There are various types of regional agreements which have different kind of commitments from the participating countries. The Free Trade Areas (FTA) in which the member’s countries reduce the trade barriers among themselves in order to protect specific sector from the competition from the non member’s countries. In Custom Unions (CU) the participating countries agree on a common trade regime and also trading with non member countries on external tariff. European Union (EU) is the most committed trade agreement. These agreements have bigger advantages on the economies of the countries.
In the nut shell these agreements and unions are helping the firms with the legal obligations and tax systems. While governments do these agreements, new policy of trade between the participants is been made to increase the trade and remove the barriers.
With reference to the theory of optimum currency area, critically examine the conditions for successful adaptation of a single currency by a custom union to enhance trade.
Combine monitoring policy has become an important factor in the global economic era. Economists have made the world a global village and want to have single currency in the globe. In economics, optimum currency area theory focused on the sharing of currency among several countries in order to maximize the economic efficiency. It is also known as the optimal currency region without considering geographical boundaries. This theory explains the optimal features for combining several currencies or creating a new currency for performing economic activities. In optimum currency area theory the sovereign countries adopt a single currency for permanently combining their exchange rates. The single currency can fluctuate only in the union for performing economic activities and the trading with the participant countries can only be done with the merged currency.
There are four main levels of the optimum currency area theory. In the first, “Pioneering Phase” the properties of OCA theory is been debated. The mainly discussions was on the exchange rates, financial markets, inflation and factors of production. The initial debate was to initiate the boarder of the currency and the resulting cost and benefits. In the second phase, “reconciliation phase” the properties of OCA is been analysed and it result in the drawbacks of some of the properties and new insight properties of OCA theory. These two phases result in analyzing the problem and inconsistency of exchange rates. However, theoretical and empirical evidences lead the concept from monitory union to cost and benefits which result in currency union. The new policies is been started to generate and many OCA properties were uniformed. These problems been coped up the in the third phase which is “reassessment phase”, which bought a new concept of “one currency, one market”. In the last phase “empirical evidence” in which the theoretical and empirical evidences is been examined. All OCA properties are re-evaluated to discover how their interpretation has transformed.
European Union initiated Euro as one median of exchange in European countries. The trading with EU can only be done in Euro which has increased the usefulness of currency as one medium of exchange. The price discrimination, market segmentation will also decrease and it will increase the competition due to one currency and one market. OCA helps in the reduction of nominal exchange rate. EU depends on one currency which means if any of the country suffers a budget deficit it will impact the whole EU. This impact will not only strain on the interest rate but also the world confidence on one currency.
In the nut shell, OCA theory applies on the world new concept of one global village. In which geographical boundaries have no importance. EU manages to trade through Euro as one currency and once market.
Use recent EuroStat data to examine the extent and the pattern of intra-industry trade within the Eurozone trading area. What are the implications of your analysis for trade creation within this trading zone?
Trade statistics helps both public and private users in shape of basic instrument for trade. The statistics helps the authorities to change their trade policy and improve competition as Eurostat data is the source of information about trade. After the new concept of world as a global village and sever as one market, Eurostat becomes the main source for data collection from the non EU member and EU members and a new system for data collection been introduced as INTRASTAT. Statistics on external trade and intra-EU trade are compiled on the basis of Community regulations. The tables used below are all taken from Eurostat. Trading has two ways, one is import and one is export. The definition of Import in terms of EU is the commodity or good which enters in to the statistical territory of EU from third world country. Export is defining as the good or commodity leave the statistical territory of EU.
According to the Eurostat data the EU trading share to the world in term of exports is higher than any other union or country in 2010. The share of EU is 16 % in terms of export and 17.3% in shape of imports which means EU plays a vital role in the world inta-industry trade. The trade balance of Eurozone trading area is negative as the imports are higher than exports.
The calculation of IIT indices can be done by several ways. It can be done by country to country and it can also be done by regions and unions. The formula is based facts and figure about the import and export of the country. The data is available on the official website of Eurostat. All the participant countries and non participant countries have to submit their trading data on Eurostat website on the basis of standard provided by UN. The data is available to the public for external trade and Intra-European Union trade statistics, as the private and public sectors analyse the opportunities thorough it. The information provided on EU on Eurostat in enough to calculate indices. The indices are determined as the price indicator. Indices can be calculated product wise, country wife and region wise. Here are some examples of Indices.
The table of indices shows that the above mentioned countries are importing more items than they are exporting. If the export and import are equal the index value is 1. If it`s less than zero it means that the imports of the country is exceeding over the exports. The trade balance is compulsory as it the country is focused on importing the commodities than the country is destroying its economy. And it’s the same as in case of exports.
The table below shows the indices per month and year for EU countries. In the same way Indices can be calculated on the basis of product, consumption and even buying manners.
Euro area (17 countries)
Euro area (16 countries)
EU (27 countries)
The calculations show that the EU countries are importing more items and exporting less. In this analysis many internal factors involve like factors of production in EU countries are much higher than other countries of the world. However, if in the case that even all of the exports are increasing in different sectors than increase in imports, it is possible than IIT will increase.
Is Eurozone an optimal currency area? Provide a critical assessment of this issue using key theoretical and empirical indicators including your analysis of the extent and the pattern of intra-industry trade within the Eurozone trading area in part (b), and an analysis of the extent of labour mobility in the Euro-zone trading area.
Eurozone is optimal currency area as EU has initiated Euro as one medium o exchange. The concept of OCA theory is to share the currency or create a new combine currency which will be used by the participant countries as medium of exchange. European Union initiated Euro as one median of exchange in European countries. The trading with EU can only be done in Euro which has increased the usefulness of currency as one medium of exchange. It will bring the equality in term of paper money and markets. Competition will be more intense as the firms are not only competing with local manufacturers but also with international players. EU is been made for the purpose of intra-industry trade, as to combine the benefits of several countries and drivers of the economies. Regional trading agreements and custom unions are playing a vital role in international trade. There are two types of countries in the world, developed countries and under developed countries. In the new concept of the world trading, the developed countries will share the resources and their expertise with under develop countries to provide the same kind of living standards to the whole world. The trade agreements is been done in between different countries in order to expand the import and export. These agreements mainly focused on the conditions of trading between the countries. The competitive advantage theory of trade suggests the countries that every single country should focused on the competitive edge they can get from other competitors. They should only focused on their resources and their expertise rather than working in several industries without expertise.
EU agreements help the participants in term of resources as well. There are no restrictions for the labour of EU countries to limits their services to home country. As, the new concept one currency, one market means the sharing of resources as well. The nominal unit of labour cost is the ratio total reimbursement of workforce with the number of persons employed. When there is a decrease in the Nominal unit it means that the unemployed number of labour is increasing.
To control on EU participant countries nominal unit labour cost, it was decided to share the labour skills with all participant countries in order to get an advantage over non participant countries. There will be exchange programs on the government levels and training programs for the labour to train them well.
The NULC is calculated by the formula: (total D1 in national currency / total employees in persons) / (GDP in market prices in CLV05 in national currency / total employment in persons)
The nominal Unit labour cost of EU countries is given below: