Question

What are the two main sources of economic gains from intra-industry trade?

Short answer

The two main sources of economic gains from intra-industry trade are 1) economies of scale, which refers to the efficiency firms acquire as their production increases, resulting in lower average costs per unit, and 2) increased product variety, which allows consumers to choose from a more diverse range of products, ultimately increasing overall utility and fostering economic growth and development.

Step-by-step solution

1. Economies of Scale

One of the main sources of economic gains from intra-industry trade is the gains achieved through economies of scale. Economies of scale refer to the efficiency firms acquire as their production increases, which results in lower average costs per unit. When countries are involved in intra-industry trade, firms can specialize in producing specific products within the industry, which helps them produce larger quantities of those specific products, taking advantage of the economies of scale. This specialization enables firms to increase their overall efficiency and, as a result, bring down the cost of production per unit. Lower production costs ultimately lead to lower prices, which benefits consumers in the form of reduced costs and increased variety of products.

2. Increased Product Variety

Another primary source of economic gains from intra-industry trade is the increased variety of products available to consumers. Intra-industry trade allows each country to specialize in producing certain varieties of products within an industry and import other varieties from trading partners. This exchange of specialized goods leads to a greater availability of diverse products in the market, giving consumers more options to choose from. The increased product variety contributes to a rise in consumer welfare as consumers can choose products that better match their preferences, ultimately increasing the overall utility of consumption. This increased product variety drives competition among firms, encouraging innovation, product quality improvements, and a more dynamic market, fostering economic growth and development.