Ne Trade Theory 979 Ne Trade Theory Krugma, 979: - Ecoomes of scale as reaso for trade - Elas trade betee smlar coutres Ituto of model: There s a trade-off betee ecoomes of scale the roducto of good tyes ad the umber of good tyes avalable. Assumtos of the model: - 2 detcal coutres - factor of roducto: abour - May frms, each roducg a sgle, uque good tye Reaso: Ecoomes of scale the roducto of a good tye - Producto uder frm-level ecoomes of scale here: decreasg average costs of roducto - Mooolstc cometto o strategc teracto, each frm has market oer - Free market etry ad et zero rofts equlbrum - Cosumers have love for varety, meag they rather cosumer small volumes of a lot of good tyes, tha a large volume of a sgle good tye
The Model: Cosumers: Utlty fucto of reresetatve customer: U v mt v > 0 ; v < 0 c : Number of roduced good tyes c : cosumto volume of good tye by cosumer Assumto about fucto v: decreasg margal utlty volume cosumed of each good tye: ove for varety Symmetrc refereces: Cosumers lke all dfferet good tyes just as much Dervg rce elastcty of demad: Utlty mamzato uder budget costrat: mau c v c u. N. B.: c I I : Per-Cata Icome 2
v c λ [ c I] Frst-Order Codtos : / c v' c λ v' c λ v' c λ 0 2 2 Prce elastcty of demad: Defto: ε dc / d / c 3. Schrtt: dc d / d / dc / 2. Schrtt: Dfferetato of 2 by c d / dc v'' c λ 4 3. Schrtt: Isertg 2 ad 4 3: v' c v'' c c ε 5 Prce elastcty of each good tye deedg o amout of volume cosumed of ths tye! EXOGENEOUS ASSUMPTION: dε / < 0 dc 3
Ituto: As the umber of good tyes/ frms creases the cosumed volume of each good tye decreases. The cosumers react much sttoger to rce chages of each good tye, therefore the market oer of each frm decreases. Oe ca therefore say that the rce elastcty s a measure for market oer of the frms. Producers: Assumto: All frms/good tyes have same cost fucto C l l 6 abour requred to roduce uts of good tye. : Fed costs for Producto of a good tye a frm measured labour uts : Costat Margal costs roducto Average costs: AC Decreasg average costs : Idea of ecoomes of scale : Number of orkers avalable Number of cosumers Overall roducto of oe good tye: c 7 4
Full Emloymet equlbrum codto: l 8 Symmetre: All goods ll be roduced the same volume ad at the same rces. Ituto: Symmetrc Demad ud same roducto costs! for all,.., 9 Varables to be determd: - / : Relatve rce of good tye - : Outut of - : umber of good tyes/ frms m Glechgecht 3 stes:. demad for good tye 2. Proft mamzato 3. Zero roft codto of frms Prce Average costs. Demad From 2 v' c λ ad 7 c c λ v' 0 5
6 We get demad by solvg for : v ' λ 2. Proft mamzato Assumto; large: Frms do ot take to accout ho ther roducto volume decsos affect decsos of other frms ad overall rces. ma π 2 B.E.O.: π d d ' 0 ' 0 / Margal Reveue Margal Costs ε ε ε d d Pres Mark-U tmes margal costs 3
ε ε 4 PP-Kurve : Proft mamzato by frms Sloe of PP-Curve: The hgher the cosumto volume c of good tye, the loer the rce elastcty for ths good tye. Market oer of the frm s the large ad therefore the rce for the good tye s hgh. Cometto effect De PP-Kurve deeds ostvely o c ad therefore has ostve sloe. - Prce deeds o margal costs ad rce elastcty of demad - PP-Curve determes the rce for gve Cosumto-/Outut-Volume of a good tye Needed for fully secfed equlbrum: Dervg Outut/Cosumto-Volume for each good tye 3. Zero roft codto π 0 0 5 / ; / 7
7 Isertg yelds: c 6 ZZ-Kurve : Zero roft codto of Frms Sloe of ZZ-Curve: The hgher er cata cosumto c og good tye, the hgher the roduced Outut of ths good tye. Due to decreasg average costs ths leads to loer average costs ad therefore loer rces as PAC. Frms ca o charge loer rces ad stll break eve. scale effect roducto The ZZ-Curve therefore deeds egatvely o c ad has egatve sloe. Grah: 8
From Grah : Per cata cosumto c of good tye The outut er godd tye also defed: c Dervg equlbrum umber of roduced good tyes From full-emloymet codto 8: l c because of symmetry! All good tyes roduced ad cosumed same amout equlbrum th same roducto fucto same amout of labour emloyed for each good tye Solvg for : c 7 Itroducg trade Assumto : To detcal coutres - Same refereces, techology ; - f : Ho does trade ork ths model? 9
Market elargemet / Icrease coutry sze: Number of cosumers demadg roduct of a frm creases Home from to, Foreg from to. What haes to the PP-Curve, ZZ-Curve f creases to? PP-Curve: Uchaged, as deedat of ZZ-Curve: c creases ZZ-Curve shfts/ss to the left Trade leads to: decreae c; decrease / 0
2 Effects:. Pr Produkto ad costat; / costat Kosum odutko 2. by assumto: dε / < 0 dc As er cata cosumto of each good tye decreases, the rce elastcty creases. Ituto: Trade leads to creased comettoe more good tyes each market: Kosum creases er cata cosumto of each godd tye decreases market oer of each frm decreases as ε creases: Smaller Mark-U Some frms caot ay for ther fed costs aymore < AC ad et the market Produkto decreases:! Note determed hch good tyes/frms leave the market!!! Because og ths et ad the broader customer base roducto volume of each godd tye actually creases the ed creases Therefore average costs decrease: Prce / decreases. Summary Effects of trade: Drect Effect: More good tyes cosumable each coutry Idrect Effect: Cheaer rces due to addtoal ecoomes of scale Patter of trade? Idetermed, hch coutry ll roduce hch good tye!
But: Each good tye ll oly be roduced by a sgle frm ad therefore oly a sgle coutry. Trade volume We ko: As all goody tyes are roduced ad cosumed same amouts equlbrum e oly eed the umber of good tyes roduced each coutry to aalyse the trade volume. Number of roduced good tyes Home autarky: c Number of roduced good tyes Home th trade: c Number of roduced good tyes Foreg th trade: c Total umber of good tyes roduced th trade: c 2
3 Share of morts eedtre Home: c c Share of morts eedtre Foreg: c c Value of morts of Home M ad Foreg M: M M Balaced trade must hold equlbrum: MM Oe ca easly the see that trade volume s mamzed f both coutres have the same sze Welfare mlcatos of trade: Absolutely ostve: Cosumers get larger varety of goods ad ca cosume them at loer rces bz. More urchasg oer