New trade theory
Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT
Meaning
New trade theory explains why similar countries trade heavily with each other. Paul Krugman (Nobel 2008) gave three reasons: economies of scale (costs per unit fall as output grows), product differentiation (consumers love variety) and network effects. Because of this, trade does not need differences in resources or technology. It explains intra-industry trade, which older theories could not.
Example
Germany and Japan have similar resources, yet they sell cars to each other. Each firm produces a few models at a large scale to keep costs low, and buyers in both countries get more choice.
Don't confuse with
- Heckscher-Ohlin theory: this explains trade between different countries through their factor endowments. New trade theory explains trade between similar countries through scale and variety.
Related concepts
- Absolute advantage
- Comparative advantage
- Gains from trade
- Autarky
- Heckscher-Ohlin theory
- Stolper-Samuelson theorem
- Leontief paradox
- Intra-industry trade
- Gravity model of trade
- Entrepot trade