International Trade Analysis: Economies of Scale, NICs, and Trade

This report delves into the intricacies of international trade, examining the concept of economies of scale and its impact on trade policies. It differentiates between internal and external economies of scale, illustrating their implications on inter-industry and intra-industry trade. The report then explores the significance of intra-industry trade, contrasting it with traditional trade theories and providing real-world examples such as the trade relations between the USA and the UK. Furthermore, the report discusses Newly Industrialized Countries (NICs), highlighting their economic growth, industrialization, and technological advancements. The report analyzes the factors contributing to their rapid development and their increasing role in the global trade landscape.

Running head: INTERNATIONAL TRADE ASSIGNMENT
International Trade Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer a:.........................................................................................................................................2
Answer b:.........................................................................................................................................8
Answer c:.......................................................................................................................................13
References......................................................................................................................................16

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Answer a:
In terms of economics, a firm, in its production operation, experiences several
phenomena with relevant implications on the production and pricing levels of the concerned
company. One such phenomenon is the economies of scale. By the term, economies of scale, the
cost advantage, which a firm starts enjoying, with the increase in the production of the good or
service it produces, is meant. In general, the total cost of production of a firm, can be divided
broadly into two types, namely, the total fixed cost and the total variable cost (Carlino 2012).
The former one has to be incurred by the firm, irrespective of the amount of output produced by
the firm. However, the latter one depends on the number of units of production of the firm.
Therefore, as the production of a firm goes on increasing, the average fixed cost of production of
the firm goes on decreasing, thereby reducing the overall average cost of production (Varian
2014). This phenomenon gives rise to what is known as the economies of scale in the firm and it
may also lead to a decrease in the average variable cost of production of the firm.
The economies of scale can be broadly divided into two categories, the internal
economies of scale as well as the external economies of scale. These two concepts, varying
according to the nature of the economies of scale can be elaborated as follows:
a) Internal Economies of Scale- A firm, while increasing the productive activities, can
experience several economies of scale in its production process, which is specifically limited to
the concerned firm itself and is not enjoyed by the industry as a whole. These economies of scale
can be termed as the internal economies of scale. For example, a firm may have especially
skilled labor for a particular production or an adept marketing team, who are not available to

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other firms of the same industry and therefore, gives the firm the scope of enjoying internal
economies of scale (Argyres and Zenger 2012).
Firm AC
AC1
AC2
AC
0 Q1 Q2 Firm Q
Figure 1: Internal Economies of Scale
(Source: As created by the author)
b) External Economies of Scale- The other type of economies of scale, known as the external
economies of scale, on the other hand, refers to the advantages that a firm gets, due to its
operation in that particular industry. In other words, when an industry expands, it experiences
several economies of scale in its overall production activities, which percolates down to the firms
under this industry. The economy of scale enjoyed by a firm, which is attributed to the growth of
the industry itself, is known as the external economies of scale. For example, with innovations

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and overall economies of scale of the telecom industry, one particular telecom operating firm
may enjoy economies of scale, which by nature, is external economies of scale (Rabellotti 2016).
Firm AC
AC1
AC2
0 Q1 Q2 Industry Output
Figure 2: External economies of scale
(Source: As created by the author)
Economies of scale, both external as well as internal, have significant implications
on the trade policy of a county, both in the domestic and the international trade scenario. Much
of a country’s share of trade activities and the nature of the goods and services traded by the
country, depends on the economies of scale which the country is enjoying and it is not enjoying
(Buera and Kaboski 2012).

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Trade, by nature, again can be of two types, namely the inter-industry trade and the
intra-industry trade, which are being discussed in the following section:
Inter-industry trade- This type of trade generally occurs between two or more
different industries, the products of the industries being distinctively different. For example, an
agriculturally rich country can produce crops in huge surplus and trade the surplus crops with
another country prospering in machine manufacturing, in exchange of their products. The main
factor influencing the nature and extent of the inter-industry trade between the countries are the
respective comparative advantages in production, which are enjoyed by each of the trading
countries (Melitz and Trefler 2012).
Intra-industry trade- This notion of trade is comparatively newer than the other
notion. Intra-industry trade means the trading of the products, which belong to the same industry.
In simpler words, when two countries involve in trading products belonging to the same industry,
then it is known to be intra-industry trade. For example, a country can make family car and trade
those with sports car, produced by another country, both the products belonging to the same
automobile industry (Vona 2013).
Over the recent few decades, the concept of intra-industry trade, has gained
significant popularity with the expansions and technological innovations occurring in different
industries all over the world. Nowadays, with more and more specialization and categorization of
products, each industry is producing various types of products, the crude basics of those products
remaining similar. Therefore, with specialization in production as well as in the factors of
production, different countries are becoming adept in producing different products of the same
industry, thereby calling for intra-industry trades between the countries (Feenstra 2015).

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However, the concept of intra-industry trade does not go at par with many traditional
trade theories, including the Hechsher-Ohlin Theory of Trade, according to which, countries
export those goods and services which can be easily produced by the factors of production that
are abundantly present in that particular country (Helpman and Razin 2014). Going by this
theory, if an industry in country experiences factor abundance, then the country will only export
that product which is produced by the concerned industry. However, intra-industry trade involves
trading of different products of the same industry between two countries, thereby challenging the
conceptual framework of the traditional trade theories (Bowen, Hollander and Viaene 2012).
However, the intra-industry trade concept can be explained with the help of the
concept of the economies of scale and its two types, as discussed in the previous sections. Like
comparative advantage, the concept of external economies of scale also does not have significant
implications on the intra-industry trade scenario of any country as external economies of scale is
only achieved by a firm due to the overall growth the industry it belongs to and does not have
anything to do with specialization (MacCharles 2012). However, if there occurs internal
economies of scale, in a particular firm, of that specific industry, due to some endogenous factors
subjected to that firm only, then, with the advent of specialization in the production of a
particular type of product, as being produced by that firm, the occurrence of intra-industry trade
seems more feasible and practical. The real life instance of Japan producing different type of cars
(mainly sports car) and Germany producing some other type of cars (focusing on making family
cars mostly)and getting into trade with each other is a clear example of intra-industry trade. This
trade relation arises from internal economies of scale in several firms and not in the industry as a
whole (Madeira 2014).

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Intra-industry trade, like other forms of trade, is gaining significant importance with
time and the major economic giants are getting involved in this type of trade increasingly. One of
the most dominant example of the growth in the intra-industry trade in the global scenario, is that
of the trade-relation and its dynamics between the two most influential economies in the world,
the United States of America and the United Kingdom. These two countries have been enjoying
significant economic relations with one another and overtime their trade relations have
strengthened, with both the countries venturing in different industries. The USA has been and is
still the biggest trading partner of the UK, with both the economies enjoying significant market
for their products in the other economy (Census.gov, 2017). The trade relation between the two
countries has helped in increasing their overall well being and dominance in the global market.
The lion’s share of the trade relations between these two countries being of the inter-industry
type in nature, with advent of time and more and more specializations in the industries, the
counties have also started enjoying the benefits of the intra-industry trade. This intra-industry
relation is developing specifically in the food and beverage industry, automobile industry and in
the labor market of both the countries (Ito and Okubo 2012).
Britain has remained as one of the chief exporters of cars, not only to the USA but
also all over the world. Surprisingly, the country is also an importer of automobiles and vehicle
parts, the nature and utilities of the vehicles imported being different from the vehicles which are
exported by the country. This has facilitated the intra-industry trade between the USA and the
UK. Apart from this sector, significant labor emigration and immigration take place between
both the countries, for a long time, due to the difference in the skills and specializations of these
labour and the difference in the labor requirements of both the countries, thereby indicating the
occurrence of a form of intra-industry trade. The food and beverages sector of both the countries

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also experience intra-industry trades due to export and import of different varieties of food
products between the two countries (Cabral, Falvey and Milner 2013).
Apart from the intra-industry trade, the two countries have much bigger inter-
industry trade relations, with the USA mainly exporting primary products like crops, forestry
products, food and beverages to the UK and mainly importing products of machinery and
electrical industries, pharmaceutical industries and mineral oils from the country. The huge inter-
industry trade relation between the two countries can be mainly attributed to the comparative
advantages that are enjoyed by the two countries in separate industries. The external economies
of the scale which the firms lying under those industries enjoy, in both the countries, due to the
expansion and overall cost reduction phenomena in the respective industries also contributed to
this (Lyon 2014).
Answer b:
The term Newly Industrialized Countries (NIC), takes into account all of those
countries, which have been and is experiencing significant development, thereby falling in
between the two categories of those of the developing countries and the first world countries.
The countries termed as the NICs are those, who have undergone significant economic growth
and progress already, such that they have left their initial dependency on the agriculture and
primary sectors for their sustenance and has embarked on the path of industrialization and
urbanization, with significant rise in the manufacturing activities in the countries. In other words,
the Newly Industrialized Countries are the ones, which are highly developing countries with

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significant rise in the share of industries and industrial activities in the economy of the concerned
countries (Kulessa 2012).
With time, more and more countries get included in this category as they go on
experiencing significant dynamics in their economic progress and overall development. The most
notable example of the newly industrialized countries are Hong Kong, Taiwan, Singapore, South
Korea, that is the Asian Tigers, Brazil, India, China, Mexico and few other countries. Over the
time, these countries have shown highly impressive performances in the economic growth
indicators, in a global scenario. In many cases the GDP growth rates of these NICs have even
surpassed those of the first world and highly developed countries, which in its turn imply that
these countries have considerable potential to catch up with the first world countries in near
future (Vithayasrichareon and MacGill 2012).
Much of this economic progress of these countries and their rapid industrialization
can be attributed to the huge technological innovations and progress in the research and
development sector of these countries. The proper utilization of these innovations has resulted in
the specialization of these NICs in different technological aspects (the specializations being
highly country specific) and has also created significant demand for the goods and services
categorically produced by these countries in the international market. This portion of the
assignment tries to analyze the impact of the expenditures done by these countries in general, for
research and development purposes, on the overall growth of exports of these countries. To study
the same the assignment takes Taiwan as the country to be studied, Taiwan being one of the most
successful examples of the newly industrialized countries in the last few decades (Destek 2016).

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Taiwan: Case Study:
Taiwan, being one of the four economic giants forming the powerful cartel of the
Asian Tigers, has developed significantly over the last few decades, thereby taking the position
of one of the most significant NICs in the world. With consistently high economic growth and
productive activities, the country is expected to catch up with those of the first world countries
over time.
The country has developed a significant export sector, with the exports continually
increasing with time and has made its position as one of the biggest Asian exporters, in the
global business market. Much of the goods and services, which form the export sector of the
country, are hi-tech and highly technology based in nature, as the country has been continually
achieving new highs in technological innovations over the last few decades. As argued by many
economists and economic surveys, the country has invested significantly in skill building and
research and development over the years. With an overall literacy rate of 98.5% and 25% of all
the university degrees being of that of engineering, the country is surely showing huge potential
in the innovation and R&D sector (Ardiente and Guiking 2015).

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Figure 3: Growth rates of the exports of Taiwan
(Source: Cfr.org, 2017)
It is evident from the above figure that barring a few exceptions, the overall growth
rate of export of the country has gone significantly up in the last few years, implying that the
country has gained significant power and influence in the global trade scenario. The main
components of the export basket of Taiwan are the semiconductors, the information and
technology industry and the precision mechanism sector, thereby showing that the country has
been experiencing significant comparative advantages in the innovation and technology sectors,
as trade can only take place when surplus is generated in a particular industry or industry-type of
a country.
Much of the exports of the country being hi-technology goods and services, it can be
argued that the country has been reaping the fruits of the immense progress in its innovation
sector, which is surely experiencing economies of scale, thereby giving the country a
comparative advantage over other countries, with respect to this sector. This, in its turn, has its
base in the research and development activities of the country as no innovation and self-

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sustainable technological progress can be done without significantly emphasizing on the research
and development sector of the country (Lin et al. 2014).
Figure 4: Top spenders on R&D in terms of the share of the GDP
(Source: Cfr.org, 2017)
From the above figure, it is evident that Taiwan ranks eighth among the top spending
countries on the research and development sector, in the world, with the percentage share of
GDP used in this sector being 2.93%. The percentage of Taiwan is just above the percentage of
the most influential economy in the whole world, the United States of America. Study findings
and the data provided above, therefore, provides robust evidences to support the belief of many
economists around the world, that the huge exports of the technological goods and services of the
country has been the fruits of the comparative advantage and the economies of scale experienced
by the country in the fields of innovation. This in turn, is highly likely to be the effect of the
substantial expenditures of the country in the fields of research and development and overall
investment of the country in skill building and emphasizing on human capital, which have

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cumulatively facilitated the pace of innovations and technological progress in the country (Lin et
al. 2014).
Answer c:
The term, optimum currency area refers to a geographical area, consisting of
different economies sharing a single currency. This is often done to facilitate trade and mobility
of the factors of production and goods and services between different regions falling in the
optimum currency area. Generally optimum currency area refers to a geographical
conglomeration of more than one country and the basic notion is to facilitate the trade and
commercial relations in an inter-country framework. However, optimum currency area can be
intra-region type too. This part of the assignment deals with this economic phenomenon of the
optimum currency area, and the viability of the Euro zone as an example of an optimum currency
area.
The eurozone refers to the union of several European countries, in monetary terms,
thereby accepting a single currency, Euro in this case, as their common currency. Among the 28
members of the European Union, 19 members have come together to form the recent Euro zone.
First formed with 11 countries, in 1999, the economic region has included more European
countries over time and has emerged as one of the largest economic zones in the history of the
world, with their common currency, Euro, being the most liquid of the currencies over the world
(Lapavitsas 2012).
There has been substantial debate regarding the viability of the euro zone as an
optimum economic zone in the new age global scenario. The basic economic notion behind

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creation of the euro zone was actually the objective of making the member countries achieve
significant growth in their economies, by facilitating trade and transactions in each other’s
market, thereby making the cartel an optimum economic zone. The initial rapid growth of the
euro zone and the potential it showed to emerge as one of the most powerful economic
conglomeration in the global scenario and would have become an optimum economic zone,
provided the severe turmoil had not occurred in this monetary cartel (Moberg 2015).
For a monetary cartel between several regions to obtain the status of an optimum
economic zone it is necessary but definitely not sufficient to create a shared common currency
only. For an economic union to be successful, there should be robust economic, political and
regulatory frameworks prevailing among the neighbor countries, with a significant monitoring
and controlling power (of required) in the hands of those who regulate the union. The euro zone,
though started showing impressive growth in the initial years of its creation, the union lacked
proper management and foresightedness. The growths of the small members were fully
dependent on the strategies taken by the large members of the union, thereby making them more
vulnerable to economic uncertainties. The common currency and low interest rate kept in the
union, were actually affecting some of the small member countries adversely as they were
experiencing high debt burdens. The crisis in the eurozone began with the bankruptcy of one of
the member countries, Greece in 2009 and by 2011, the crisis escalated to a huge level and
several other countries including Portugal, Spain, Italy and Ireland also showing the potential of
becoming sovereign debt defaulters. The recent event of Brexit, involving the withdrawal of the
UK from that of the European Union, in 2016, gave another shocking blow to the monetary
union of the European countries (Lin and Treichel 2012).

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Therefore, as can be seen from the above discussion, the eurozone, though having
the potential to become an optimum economic zone in future, can still not be considered to be
one, despite of its impressive performances in the initial phase of the creation of the union.
Sufficient reframing and reforming of the policies and regulations has to be done with respect to
the union, such that the economic union benefits all the member countries and not only the
bigger and more influential ones (Lin and Treichel 2012).

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