CHAPTER 4 POST-HECKSHER-OHLIN

THEORIES OF TRADE

 The product cycle theory

 The Linder theory
 The intra-industry trade theory
§1 The Product Cycle Theory
1. The imitation lag hypothesis

 Formally introduced in 1961 by Michael V. Posner ( 波斯

纳 ).
 It paves the way for a better known theory — the product
cycle theory.
 The same technology is not available in all countries.
 There is a delay in the transmission of diffusion ( 传播 ) of
technology from one country to another.
 The imitation lag: The period of time between
when the product is produced in Country I
and when it is produced in Country II.
(take time to learn, purchase inputs, install equipment, process
the inputs, etc. )

 The demand lag: The period of time between

when the product is sold in Country I and when it
is demanded by consumers in Country II.
New foreign goods may not be
regarded as perfect substitutes
Time between the production of
for known domestic goods
good in the inventing country to
the beginning of the production
in
the importing country.
DEMAND LAG
(3 months)

IMITATION LAG
(8 months)

NET LAG
(5 months)
Time

Figure 4-1 Imitation lag hypothesis

2. The product cycle theory

 Built upon the imitation lag hypothesis, was

developed in 1966 by Raymond Vernon.

 Vernon emphasizes manufactured goods, and the

theory begins with development of a new product in
the USA.

 The new product: (a) cater to high income demands

because the USA is a high-income country; and (b) to
be labor-saving and capital-using in nature.
Life cycle: three stages

 1st Stage: New product stage

 Produced and consumed only in the USA.
 Product and the production process in a state of change.
 No international trade takes place.

 2nd Stage: Maturing product stage

 Some general standards, mass production techniques,
economies of scale (contrasts with H-O and Ricardo).
 Overseas demand occurs.
 Export, principally to Western Europe.
 Investment? if so, exports decline, may even import.
 3rd Stage: Standardized product stage
 Knowledge of the technology widespread.
 Production is moved to where it is cheapest,
may shift to developing countries.
 Developed countries produce other products.
 Trade pattern: the USA imports the product
from other developing countries.

 The country source of exports shifts throughout the life

cycle of the product. (Early on, then displaced, ultimately)
 Examples: Electronic products, textile and apparel
industry, automobile
 Factor mobility, economies of scale.
 Home
Production,
consumption
consumption
of product

Home
production

Time
0 t0 t1 t2
New Maturing Standardized
Figure 4-2 Pattern of trade for home invention under product cycle theory
The country source of exports shifts throughout the life cycle
of the product
PCT and Dynamic Comparative Advantage

EXPORT
     TV
CHINA

JAPAN

IMPORT U.S.A
§2 The Linder Theory

 The theory of demand preference similarity, income trade theory.

 By the Swedish economist Staffan Linder in 1961.
 Exclusively demand oriented, dramatic departure from the H-O
model.

 Linder acknowledged that in natural resource based industries,

trade was indeed determined by relative costs of production and
factor endowments.

 However, Linder argued, trade in manufactured goods was

dictated by the similarity in product demands across countries.
1. Assumptions of the Linder theory

 (1) Consumers tastes depend on per capita income level.

As per capita income rises, the complexity and quality
level of the products demanded by the country's
residents also rises.

 (2) Entrepreneurs are more knowledgeable about their

own domestic market than about foreign markets.
Gain success and market share at home first, then
expand to foreign market that are similar in their
demands or tastes (similar per capita income level).
2. Trade comes in the overlapping ranges of product sophistication
Goods
J
Country III’s demand and production

H
Country II’s demand and production

G
F
E
County I’s demand and production

D
C
B
A

Income levels
Country I’s income

Country II ’s income

Country III ’ s income

Figure 4-3 Overlapping demands in the Linder Model

Conclusion:

 The most intensive trade, according to Linder, would exist

between countries of the same income or industrialization
levels, not dissimilar levels as often concluded from
previous theory.

 The theory implied a large part of international trade would

consist of the exchange of similar or slightly differentiated
goods.

 Counter samples: some products are only for exports.

CHRISTMAS TREE (China).
§3 Intra-Industry Trade Theory
Exchange of products belonging to the same industry.

1. Explanations of intra-industry trade

(1) Economies of scale. Specialise in a limited variety of production

and thus reap the advantages of increasing returns.
(2) Product differentiation. Producers try to achieve brand loyalty.
(3) Interaction of factor endowments and product variety.
Capital-abundant countries export high quality varieties ( 品种 ).
Labor-abundant countries export low quality varieties.
(4) Degree of product aggregation ( 聚合 )
The broader the category, the greater intra-industry.
 Xi - Mi
IIT = 1 -
Xi + Mi

2. Measurement of intra-industry trade

Measurement of intra-industry trade for a particular industry

Xi - Mi
IIT  1 - Xi : the value of exports of industry i
Xi  Mi Mi : the value of imports of industry i.

If Xi > 0 and Mi = 0, IIT = 0. (no trade overlap)

If Mi > 0 and Xi = 0, IIT = 0. (no trade overlap)
If Xi = Mi ， complete trade overlap, IIT = 1 (or 100 if the index is
expressed as a percentage by multiplying by 100)
Example: GOOD EXPORTS($) IMPORTS($)
Fruit 65 54
Toy 56 680
Car 700 200
Movie 300 97

65 - 54 11
IITf = 1 - = 1- = 0.9076
65 + 54 119
56 - 680 624
IITt = 1 - = 1- = 0.1522
56 + 680 736
700 - 200 500
ITc = 1 - = 1- = 0.4444
700 + 200 900
300 - 97 203
ITm = 1 - = 1- = 0.4887
300 + 97 397
(2) Measurement of intra-industry trade for a country as a whole

∑ ( Xi / X ) - (Mi / M )
IITi = 1 -
∑ [( Xi / X ) + (Mi / M )]

( X / X ) - (M / M ) : The absolute value of the difference between

i i

the share of exports and imports in category i

[( Xi / X ) + (Mi / M )] : The sum of the export and import shares in

category i.

∑ sign: summing over all the commodity categories

The denominator ∑ [( Xi / X ) + (Mi / M )] must have a value of 2.
Example:
GOOD EXPORTS($) IMPORTS($)
A 400 100
B 100 300
C 200 200
Total 700 600

400 700 - 100 600 + 100 700 - 300 600 + 200 700 - 200 600
IIT = 1 -
( 400 700 + 100 600 ) + (100 700 + 300 600 ) + ( 200 700 + 200 600 )

0.571 - 0167 + 0.143 - 0.5 + 0.286 - 0.333

= 1-
(0.571 + 0.167) + (0.143 + 0.5) + (0.286 + 0.333 )
= 0.596