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Sem 5 Prep
← Intl TradeThe product cycle and technology-based trade

Formulas for this chapter

Net exports of a product

NX = production - consumption

The one calculation the product cycle needs. Apply it to the innovating country in each period: the sign tells you which side of the cycle the product is on, and the moment it turns negative is stage V.

Production
Units the country makes in the period
Consumption
Units the country uses in the period
NX
Net exports; positive is a net exporter, negative a net importer

World market clearing check

sum of production across nations = sum of consumption across nations

Use it to fill in a missing cell of a product cycle table, and to check your net export figures: in a two-country world one country's net exports must be the exact negative of the other's.

Production
Output of each nation in the period
Consumption
Use in each nation in the period

Time compression of the product cycle

Fall in the diffusion lag % = (old lag - new lag) / old lag x 100

To put a number on time compression. The same arithmetic measures how much of the innovator's temporary monopoly period has been lost.

Old lag
Years from introduction to displacement for an earlier product
New lag
Years for the recent product

Research and development intensity

R&D intensity = R&D expenditure / sales

Gruber, Mehta and Vernon's proxy for the temporary comparative advantage a firm or nation holds in new products. Always scale spending to size before comparing two firms or two countries.

R&D expenditure
Spending on research and development in the period
Sales
Turnover in the same period, in the same currency
Step 4 of 26
The real wordsTheory

What the gap model cannot tell you

Two shortcomings, and the exam likes them because they are the reason the next model exists.

  • It does not explain the size of technological gaps
  • It does not explore why gaps arise, or how they are eliminated over time

It tells you a gap exists and that trade follows from it. It does not tell you how wide the gap is or how long it lasts.

Vernon's product cycle model is a generalisation and extension that answers the "how it closes" half.

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