Question

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.

Short answer

Improved technology pushes the average cost curve down.

Step-by-step solution

Step1. Introduction

Intra-industry trade refers to the trade between countries (i.e. internationally) within an identical industry.

Technological improvements shift the average cost curve, and

therefore the production possibility frontiers reverse the trade dynamics.

Step2. Explanation

If there are technological refinements in the production techniques, the cost of production shall decline. This will shift average cost curves downwards and vice versa.

Considering the production technology for good A has enhanced, the country can now, therefore, produce more quantities of good A at the same level of input resources. This can be clarified as under using PPC:

This implies a decrease in the opportunity cost of good A's production. Now, this country has a more distinguished comparative benefit than the rest. Thus, it can be said that it would lead to more increased gains from the trade-in good A for this country.

As the technology has enhanced good A's production, more countries would want to trade with this country. This is what is directed as the intra-trade industry. Therefore, the country will experience higher trade returns.