2 DEC SS Q.50

Read the following passage carefully and answer the question.
Intra-industry trade arises in order to take advantage of important economies of scale in production. That is, international competition forces each firm or plant in industrial countries to produce only one, or at most a few, varieties and styles of the same product rather than many different varieties and styles. This is crucial in keeping unit costs low. With few varieties and styles, more specialized and faster machinery can be developed for continuous operation and a longer production run. The nation then imports other varieties and styles from other nations. Intra-industry trade benefits consumers because of the wider range of choices. i.e., the greater variety of differentiated products, available at lower prices made possible by economies of scale in production. Because of this, large welfare gains arise from the ability of consumers to greatly increase the variety of goods that they can purchase through trade. The importance of intra-industry trade became apparent when tariffs and other obstructions to the flow of trade among members of the European Union or common market were removed in 1958. It was found that the volume of trade surged but most of the increase involved the exchange of differentiated products within each broad industrial classification.