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 average cost curve down.

Step-by-step solution

Step1. Introduction

Intra industry trade refers to the trade between countries (i.e. internationally) within the same industry.

Technological advancements shift the average cost curve, and hence the production possibility frontiers which change the trade dynamics.

Step2. Explanation

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

Assuming the production technology for good A has improved, the country can now hence produce more quantities of good A at the same level of input resources. This can be explained as under using PPC:

This implies a reduction in opportunity cost of good A's production. Now, this country has greater comparative advantage than rest. Thus, it can be said that it would lead to higher gains from the trade in good A for this country.

As the technology has improved in good A's production, more countries would want to trade with this country. This is what is referred to as intra trade industry. Hence, the country will experience higher trade gains.