A German manufacturer makes Porsches and a French one makes Citroëns. They specialize in a different quality, price, etc, and ship their products across borders.

How does specialization not explain (cross-border) trade?

I think this subject of international trade is above my head (not too difficult). I don't understand why there needs to be an explanation answering why do Germany and France trade cars with each other that differs from the explanation answering why do Honda and Toyota both have viable market shares.

Other trade models would predict countries to specialize in industries in which they were relatively more productive (comparative advantage) or had an advantage in resources (factor abundance). So you could get Japan specializing in cars, but maybe having several firms that make cars. You could even get several countries specializing in the same good. In these types of models, though, these countries would not trade cars with each other, especially if you factor in transportation costs. They would just consume the cars produced locally and export the surplus.

The problem here is not explaining why countries would do that (well done, well done) but to wonder if it is actually reasonable. By explaining how "rational" all this is you do in fact run the risk that people actually think it's a reasonable thing to do.
[which of course leads us right back to the question about "good economist"]

QFT

I think the point is that if French Car Company produces cars that people in Germany like, and German Car Company produces cars that people in France like, why wouldn't French Car Company also produce the German variety, and vice versa? This would lower costs for everyone by reducing transportation costs from shipping the goods.

Of course you need to take into account the extra cost of specializing in a specific model of car, rather than just looking at "cars" as a homogeneous good.

Strangely there are plants of the French companies outside of France...

clowntable,

I don't really know what you are getting at. A theory of international trade seems very easy to motivate. Different countries produce different ranges of goods. Most countries are net importers of some goods and net exporters of other goods. There are various other patterns of trade that seem to be fairly regular. Why not ask what explains these patterns?

Aside from this, there are major debates about trade policy. So a theory of trade should explain what the consequences of lowering trade barriers are in terms of GDP, prices, consumption, etc. Will everyone be made better off? If not, who will be worse off and who will be better off? Will the economy as a whole be better off? Etc.

Is there a difference between trade theory and a theory of autarky general equilibrium? Yes -- trade theory accounts for geography. Not necessarily with distance, but by accounting for different factors of production being located in different places. The factors of production may not be very mobile (e.g. because of immigration restrictions), so the geographic difference may persist. But goods can be mobile if trade is allowed.

I know, but the fact that companies like this exist complicates the analysis a lot. The whole idea of international trade is that a company in country A means that the production actually takes place in country A. With the development of inter and trans national corporations, international trade requires new analysis.

At least in the West you can't make the exact same car, because the state will punish you.

As a libertarian I'm strongly against this regulation ofcourse.

This illustrates perfectly the problem of economic "models"; they contain false assumptions that lead to bizarre outcomes.

The Austrian answer to this "conundrum" is trivial. Diseconomies of scale prevent a single car company from becoming large enough to capture the market for all cars. Competitive product differentiation ensures that different car companies, that can be in different countries, will make different styles of cars. Nothing restrains consumers in one country from either prefering the cars made in their own country or cars made in another. Hence, countries that make similar qualities of cars at similar prices will still trade cars with each other. QED. But if you craft some goofy mathematical "model" to show this, you get a frigging Nobel Prize.

i wish you would stop abusing QED like that. if you can give a source for the predictions from austrian trade theory, then i'll look at that. otherwise, you are saying something akin to "evolution is so obvious, why should we give that darwin guy any credit."

I'm not abusing it. Is there something wrong with my analysis or not? If there is, where is it?

i don't know if there's anything wrong, but you certainly haven't demonstrated anything, which is the D in QED.

edit, also from your story there is no reason why the different car companies would be in separate countries instead of the same country.

I demonstrated why countries trade cars, even of similar price and quality, with each other. If you claim I didn't, then you should be able to point out the logical error.

Let's break it down step by step.

I will take this as an assumption in your argument, that diseconomies allow at least 2 companies to exist.

Here is a second assumption -- that products will be differentiated. You have argued that one company cannot supply the whole world, so there must be at least two companies. But why can't the companies all be located in the same country?

You haven't established that cars are made in both countries. Aside from that, this is just allowing for general preferences about cars.

Again you have not established that cars are made in both countries. Even if cars are made in both countries, it is not clear why each country would not produce the full range of differentiated cars.

The same point you made earlier.

Same assumption as Krugman.

They could be. I said they can be in different countries. If there are not car companies in different countries then there is no need to explain why different countries trade cars, is there?

It's observed for Christ's sake. What do you think we're trying to explain again?

Yes.

I repeat: It's observed for Christ's sake. What do you think we're trying to explain again?

Because there is only so much market for cars, hence there is only so much capacity to make cars that can exist on the market, and manufacturers seek to compete via product differentiation, i.e. the things you have already stipulated, and the very thing that Paul Krugman gets the Nobel Prize for "modelling" (which you have no problem with), but when I say it, you start gyrating.

I don't really know what to say. In your story it seems that car companies are equally likely to locate in one country or to be located in both countries. You then observe that they are located in both countries. So that fits with your model, but your model doesn't really explain what is observed.

Here is my model of the WSOP: anyone who enters can win. I then observe who wins and it is consistent with the model. But my model hasn't predicted the winner.

While it is true that you are making some of the same assumptions as Krugman, you aren't really telling the same story. Anyway, I'm not sure what your point is. I thought originally you might have been trying to claim that Austrians had already explained all of this. It seems that you might also be arguing that the trade model is trivially simple.

First I would say that the theory doesn't mention probabilities in this sense, accepting that car companies can exist in multiple or single countries doesn't assume that those likelihoods are are equal.

Secondly, what both sides are trying to explain is why there are multiple car companies when 'economies of scale' could be construed to predict that eventually one car company would dominate the market.

Your first point is right, his story is essentially silent on the geographic distribution of companies. It gives us no reason to believe that cars being produced in multiple countries is any more or less likely than cars being produced in a single country.

I don't agree with the second point. One of trade theory's main goals is to explain the geographic distribution of production. Sure a trade theory should be consistent with facts like there being multiple firms within industries, but an explanation of that fact alone would not constitute a theory of trade.

I'll try to add some more to the trade theory thread later. That may make my frame of reference a little clearer.

Clearly a Nobel worthy man

"the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious."

Missed this reply.

Once a theory has demonstrated that multiple companies can be expected to exist within an industry we can simply apply (though it wouldn't be simple in practice) our understanding of comparative advantage to explain the distribution. Labor costs, availability of raw materials, distance to market, import or export tariffs, etc.

Paul Krugman's blog is continuing to provide me daily entertainment.

http://krugman.blogs.nytimes.com/200...about-history/

He states that the reason there was no multiplier effect in U.S during WWII was rationing.

http://krugman.blogs.nytimes.com/200...about-history/

Says Germany is making a stupid mistake for not increasing fiscal programs. Says this will hurt Europe and Germany especially.

In this newsweek article the German Finance minister seems to be making a lot of sense.

http://www.newsweek.com/id/172613

That's the type of thinking we need.

Paul Krugman continues to attack the Germans for not spending recklessly!!!

http://www.nytimes.com/2008/12/15/op...gman.html?_r=1

http://krugman.blogs.nytimes.com/200...ish/#more-1147

I'm sure when we look back at this recession and Germany seems to have done better then other European countries, they will make the excuse that Germany benefited from the debt of everyone else.

After reading these articles I really want to find Krugman and kick him in the shin.