Market gains are as a result of various factors and principles in the market. Since pre-historic times, the gains occurred from long distance international trade. Most people in the pre-urban sector benefit from long distance trade gains. For example, for the past 10,000 years, the Plato’s Academy was built by profits from Athenian silver exports (Melitz and Trefler, 2012). It is evident that it took longer than planned to build Rome since the goods moved too slowly in the Roman trade network. In the past day's trade was dominated by the movements of production, mined and harvested goods. However, this is not the case in the present world; the international trade is now conquered by two above fascinating facts (Melitz and Trefler, 2012). The first was the introduction of intra-industry trade, and the following facts rely on the idea that the world trade is dominated and surrounded by productive, enormous and extraordinary firms. The existence of intra-industry trade and large multinational has changed the manner in which most economists view the gains they receive from trade markets (Melitz and Trefler, 2012). Moreover, the sources of gains in the trade market are of various kinds. The main and the elaborated sources in this book are three. All the three sources of trade gains have different ways and methods they use to link to the benefits and the activities in the trade or market that facilitate either the decrease or increase of the gains (Melitz and Trefler, 2012). Therefore, in this regard, this paper illustrates and addresses the three sources of market gains and how they interlink with the market phenomenon. Moreover, the paper reviews the gains both in theoretical and empirical methods. The paper will use different examples to relate and show a real example of the scenario discussed.
The first main source of trade is interconnected and linked with intra-industry trade. However, for one to get a legalized and weigh intra-industry trade documents, some needs to have a beginning with the classification schemes, which assign flows in a trade to a given business. Therefore, trade flows, in this case, are either intra-industry trade or inter-industry trade (Melitz and Trefler, 2012). Intra-industry trade includes two-way trade within the same code in an industry classification. Moreover, inter-industry includes the imports as well as the exports between separate and different industry codes. Standard International Classification codes help in the process of categorizing trade flows in the world. The classification contains around 1,161 industries with different codes (Melitz and Trefler, 2012). However, the industries are aggregated to form a very tiny subset of industries. Most Companies experiences higher share of the intra-industry trade when the production and exportation involve differentiated manufactured properties, which have a similar brand with imported goods. In 2000, most of the countries, which recorded with high rate in intra-industry trade, were in most case industrialized nations. Some of the Nations includes Mexico, Czech Republic, Hungary, and Slovak Republic (Melitz and Trefler, 2012). The surprise of the trade market clings on the increase of China’s trade share increasing by 50%.
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Product differentiation and economies of scale produce intra-industry trade by use of hypothetical examples. The use of this kind of gain provides a major rationale to the trade among two same and well-related countries, providing a major contrast to the achievements in the inter-industry trades (Melitz and Trefler, 2012). Different technology and factor supplies exist in this category. By theoretical analogy or example, same countries tend to generate different widget varieties subject to similar constant on returns on scale technology. The fact that two or more countries can trade together leads to the possibility or ability of both countries to produce more production that what each country can produce on their own (Melitz and Trefler, 2012). Therefore, this kind of trade expands the level of consumer choices increasing the tradeoffs between product variety and consumption units. Market and business examples in the real world examples exist between Canada and the United States. The integration process between the two countries existed from the point of signing Auto Pact in North America in 1964 (Melitz and Trefler, 2012). Before this integration, most of the car models had a general production point in the United States for the purpose of customers in the United States and Canada to take care of the Canadian customers.
The second source of gains from trade arises from the reallocation that exists at the firm level. A more free state of production affects the productivity. It forces the firms to move down and up from the average cost curve (Melitz and Trefler, 2012). The reallocation is in the form of less and more productive firms. For the better level of understanding the phenomenon, a model of trade with the independent company is the most desired kind of enterprises for use in this case. Heterogeneous firms are the kind of firm in which the performance varies across different kinds of firms. In this case, it is then easier to capture the manner in which different firms are having different characteristics, tend to have different responses towards various trades (Melitz and Trefler, 2012). Opening up to a trade and being ready to be part of the trade, implies that one of the two firms in each of the country broke down. Some of the firms also continue to exist carrying the vision of the company forward (Melitz and Trefler, 2012). Therefore the gains come in as a result of shifting resource away from less productive firms to more productive companies.
The third source of gains from trade exists from the positive impacts of the larger markets in the form of innovation (Melitz and Trefler, 2012). Upfront development costs are most important and crucial in new productivity enhancing different processes and products in the market. The theories that govern gains by innovation were developed through similar firms by Helpman and Grossman (Melitz and Trefler, 2012). On the level of a firm, there is a strong relationship that conspires between innovation and exporting processes. Therefore, these kinds of gains are dealt with within-firm efficiency, which contrast with the second source which deals with allocative efficiency (Melitz and Trefler, 2012). Therefore, to most firms and trade sectors, innovation is key in the realization of business gains and ensuring that all factors are put in place to maximum the rate of innovation to firms leading to a total high production rate in a country.
In conclusion, therefore, three sources of gains exist in a trade market. Gains accrued from the increased economies of scale and variety, productivity gains by shifting resources away from low productivity to high productivity in a market at the industry level. The third source is at the firm level by innovation in a larger market. However, the empirical confirmation of the returns from the trade markets is predicted with models of different firms which represents one of the most significant advances in international economies. Therefore the review is basically on gains from trade. Moreover, the model of the inter-industry used indicates the production of both losers and winners. However, the idea of reallocation produces most of the long-term gains which are discussed in the paper. Gains in the trade have different origins.
Reference
Melitz, M. J., & Trefler, D. (2012). Gains from trade when firms matter. The Journal of Economic Perspectives , 26 (2), 91-118.
