Difference In Costs

Perhaps the most important reason for trade is differences among countries in production costs. For example, manufacturing processes enjoy economies of scale; that is, they tend to have lower average costs of production as the volume of output .expands. So when a particular country get head start in producing a particular product, it can become the high volume, low-cost producer. The economies of scale give it a significant cost and technological advantage over other countries. which find it cheaper to buy from the leading producer than to make the-product themselves. Large scale is often an important advantage in’ industries with large research and development. As the leading aircraft maker in the world, Boeing can spread the enormous cost of designing. developing, and. testing a new plane over a large sales me. That means it can sell planes at a

lower than competitors with a smaller. Boeing’s only real competitor. Airbus, got off the ground through large subsidies from several European countries to cover its research and development costs.

The example of decreasing cost helps explain the Important phenomenon of extensive intra industry trade shown in Table 15-l. it that the United States both imports and exports computers and related equipment? The reason ‘is that the United States has exploited the economies of scale in microprocessors and is specialized in that area, while J~pan enjoys a cost advantage in memory chips art Video screens for notebook computers and tends to specialize and export in that part of the market. Similar patterns. of intra industry specialization are seen with cars, steel, textiles, and. many other ‘manufactured products

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