NEW TRADE THEORY

New Trade Theory (NTT) is an economic theory developed in the 1970s to predict international trade patterns. NTT claims that economies of scale and network effects will benefit from exporting tablets for sale in other countries

The main motivation for developing NTT is that, unlike traditional trade models (or "old trade theories"), most of the world trade takes place between countries and is similar to the foundation in terms of development, structure, and factors

The new trading theory included two new concepts:economies of scale and network effects. By studying the impact of tariffs and trade on the economy. By exploring two new concepts of boundaries and the influence of the Internet. This included studying the impact of globalization on the international economy

IMPLICATION OF NEW TRADE THEORY

• This is where theory suggests that nations may benefit from the trade even when they do not differ in resource endowments or technology.

• Trade allows a nation to specialize in the production of certain products, attaining scale economies and lowering the costs of producing those products, while buying products that it does not produce from other nations that specialize in the production of other products.

• The theory also suggests that a country may predominate in the export of a good simply because it was lucky enough to have one or more firms among the first to produce that good.

INCREASING PRODUCT VARIETY AMD REDUCING COST

  • new trade theory, is that each nation may be able to specialize in producing a narrower range of products
  • by buying goods that it does not make from other countries
  • Each nation can simultaneously increase the variety of goods available to its consumers and lower the costs of those goods

Economies of scale

  • Cost advantages companies experience when production becomes efficient, as costs can be spread over a larger amount of goods. A business's size is related to whether it can achieve an economy of scale larger companies will have more cost savings and higher production levels.
  • In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced.
  • The cost advantage experienced by a firm when it increases its level of output.

First-mover advantage

  • Can be simply defined as a firm's ability to be better off than its competitors as a result of being first to market in a new product category.

Pattern of trade

  • A country's balance of trade is defined by its net exports (exports minus imports) and is thus influenced by all the factors that affect international trade.

This include factor

  • Endowments
  • Prodectivity
  • Trade Policy
  • Exchange Rates
  • Foreign Currency Reseves
  • Inflation
  • Demand

Effects of Economies of Scale on Production Costs

  • It reduces the per-unit fixed cost. As a result of increased production, the fixed cost gets spread over more output than before.
  • It reduces per-unit variable costs. This occurs as the expanded scale of production increases the efficiency of the production process.

Types of Economies of Scale

Internal Economies of Scale

  • This refers to economies that are unique to a firm. For instance, a firm may hold a patent over a mass production machine, which allows it to lower its average cost of production more than other firms in the industry.

External Economies of Scale

  • Business-enhancing factors that occur outside a company but within the same industry. In addition to lower production and operating costs, external economies of scale may also reduce a company's variable costs per unit because of operational efficiencies and synergies.

Sources of Economies of Scale

*Purchasing - Firms might be able to lower average costs by buying the inputs required for the production process in bulk or from special wholesalers.

  • Managerial - Firms might be able to lower average costs by improving the management structure within the firm. The firm might hire better skilled or more experienced managers.
  • Technological - A technological advancement might drastically change the production process.