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What does the Grubel-Lloyd index show
It shows how much a country imports and exports the same kind of products.
A high score (close to 1) means the country both buys and sells similar goods.
A low score (close to 2) means it mostly only buys or only sells that kind of good.
Why does operating in amonopoly result in a sub optimal outcome for the economy
in a monopoly, they will charge a mark-up over the marginal cost which leads to a low production
Describe the concept of love-of-variety
The love-of-variety in economics explains intra-industry trade as a result of consumers' preference for a wide range of similar but differentiated products. Even similar countries trade within the same industry (like different types of cars) to satisfy this demand for variety. This leads to mutual gains from trade through increased choice and economies of scale.
What type of intra industry trade exists?
–horizontal intra industry trade; at the same stage of processing; product differentiation
–vertical intra industry trade; at different stages of processing; “fragmentation”
When does the economy achieve optimal equilibrium given no trade in imperfect competition
•domestic production = domestic consumption
• MRS = MRT = pM/pF
How does firm behavior differ in a monopoly vs. an oligopoly?
A monopoly sets output where MR = MC and charges a higher price, producing less.
In an oligopoly, a few firms compete, each choosing output based on what others produce assuming their outputs are fixed, still using MR = MC to maximize profit.
Describe the concept of "pro-competitive gains from trade" in the context of imperfect competition. Why does trade lead to a more efficient outcome?
Pro-competitive gains from trade refer to the improvement in economic efficiency that occurs when international trade increases the level of competition in markets that were previously monopolistic or oligopolistic.
- More firms enter the market.
- Market shares of individual firms decrease.
- This leads to lower mark-ups over marginal cost.
As a result, the distortion between MRS and MRT shrinks, bringing the economy closer to the optimal allocation of resources.
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