New Trade Theory – An Introduction
- New Trade Theory (NTT) is an economic theory that was developed in the 1970s as a way to understand international trade patterns. NTT came about to help us understand why developed and big countries are trade partners when they are trading similar goods and services. These countries constitute more than 50% of world trade.
- This is particularly true in key economic sectors such as electronics, IT, food, and automotive. We have cars made in the India, yet we purchase many cars made in other countries.
- These are usually products that come from large, global industries that directly impact international economies. The mobile phones we use are a good example. India produces them and also imports them. NTT argues that, because of substantial economies of scale and network effects, it pays to export phones to sell in another country.
- Those countries with the advantages will dominate the market, and the market takes the form of monopolistic competition.
- Monopolistic competition tells us that the firms are producing a similar product that isn't exactly the same, but awfully close.
Economies of Scale: As a firm produces more of a product its cost per unit keeps going down. So if the firm serves domestic as well as foreign market instead of just one, it can reap the benefit of large scale of production consequently the profits are likely to be higher·
Network effects are the way one person’s value of a good or service is affected by the value of that good or service to others. The value of the product or service is enhanced as the number of individuals using it increases. This is also referred to as the ‘bandwagon effect’. Consumers like more choices, but they also want products and services with high utility, and the network effect offers increased utility from these products over others. A good example will be Mobile App such as Whats App and software like Microsoft Windows.
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