12. the new trade theory.
- the new trade theory suggests that as a company increases the extent to which it specializes in the production of a particular good, then output increases because of gains in efficiency.
- as specialization and output increase, the company can achieve economies of scale, thereby pushing the unit costs of production lower (unit cost reductions associated with a large scale of output). This is why as many companies expend, they lower prices to buyers and force potential new competitors to produce at a similar level of output if they want to be competitive in their pricing.
- in addition to economies of scale, learning effects also exist in the industry and resulting in increasing returns to specialization leaning effects are cost savings that come from learning by doing. For example, workers learn by repetition how best to carry out a task. Labor productivity increases over time and variable unit costs fall as individuals learn the most efficient way to perform a particular task.
- thus, the presence of large economies of scale and learning effects can create an industry that supports only a few large firms and it also allows a firm to gain a first- mover advantage.
- this process also encourages for government intervention and strategic trade policy.
- the new trade theory is not consistent with the h- o theory. The new trade theory argues that the u.s. leads in exports of commercial jet aircraft not because the u.s. is better endowed with the factors of production required to manufacture aircraft, but because one of the first movers in the aircraft industry (as a result of economies of scale and learning effects plus some government helps).
- in conclusion, the new trade theory states that:
// there are gains to be made from specialization leading to increases in economies of scale and learning effects;
// the companies first to enter a market can create barriers to entry (first- mover advantage); and
// government may play a role in assisting its home- based companies.