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and the other side is Airbus. And suppose they are trying to build an aircraft with a passenger seat of say 500, for example. So Airbus has two choices. Whether it's going to produce, or don't produce. And Airbus has the same kind of choice, Either to produce or don't produce.

However, there are a number of airlines, airline companies that actually operate based on Boeing and Airbus. They have some kind of demand for aircraft. Say Korean Air is going to demand a certain number of aircraft per year. And say United Airlines is going to purchase a certain aircraft per year, etc. But in most of the cases, airlines do not just increase aircraft purchase. Just in 401 because they have kind of consistent demand for consumers.

So that if they are going to increase the aircraft, they have to pre-plan. So that nothing is going to be made. Airline companies are not going to make purchase decisions just overnight. They are going to pre-plan their purchasing decisions. And since there is a limited demand for aircraft, for this kind of 500 passenger aircraft, for example,

So both companies, Airbus and Boeing, are deciding whether they are going to produce 500 passenger aircrafts or not. Of course they are now in the decision process. If both Airbus and Boeing are going to produce, then both of them are going to supply to all the airline companies. And airline companies have limited demand for aircrafts so that if both of them produce and if they sell, then they have to compete in the price.

that if both of them stay produced, they're going to have a profit of minus one, for example. Because the market is pretty limited and whenever they come up with a new type of passenger aircraft, they have to spend a lot of research and development costs so that they need a lot of fixed costs. And if they actually, most of them produce, then they have to share the market share into half. So help us take the half and boy take the half so that they do not make enough profit to cover the research and development costs.

that profit could be negative, for example. But if Airbus produce and Boeing does not produce, in that case, since Boeing does not produce at the first place, profit is going to be zero. No revenue, no cost. However, if Airbus produces alone, it's going to capture the whole market. So let's suppose that it's going to have the profit of 100. And vice versa, let's just suppose that Boeing and Airbus because it has the same kind of technology and same kind of cost.

So that if Boeing is the only one that produces, then Boeing is going to have a revenue of 100 and Airbus is going to have zero. And if both of them do not produce, then of course both of them are going to have a zero and zero. Because they do not have any kind of revenue, they do not have any kind of cost. Knowing this, what do you think is going to be the final outcome? These are the four possible scenarios that each of them has two choices.

either to produce or not to produce. So we have a four outcome. And what do you think will be the final outcome?

So suppose Boeing believes that Airbus is going to produce. Suppose that Boeing believes that Airbus is going to produce for sure. If that is the case, if that's the belief, then what choice would Boeing choose? What option would Boeing choose? In that case, it's not going to produce because zero is better than minus five. So if Airbus is going to produce for sure, then Boeing is going to choose this one. If Airbus is going to choose this one for sure, then Boeing will choose for sure.

Boeing is going to choose this one. And same goes for Airbus. If Boeing is going to produce this one, then Airbus is not going to produce. So, output is going to be either one of these. Either one of these is going to be the outcome. And which one is going to be the outcome among these two? Whoever enters the market first. Whoever decides to produce the good, 500 passengers in the airlock. You have three

to produce first then knowing that Boeing is going to produce for sure Airbus is not going to enter or if Airbus is started first then knowing that Airbus already started production then Boeing is not going to produce. So these are going to define the outcome and either one of these is going to be chosen by acting first. But doing this if they are trying to make a decision which

simultaneously, so both of them have not made a decision yet. So Boeing doesn't really know whether Airbus is going to choose, which one Airbus is going to choose, and Airbus doesn't know which one Boeing is going to choose. In this case, when both companies do not know what is the choice of the other company, then in this case, there is a rule for the government, saying that our government says, and are willing to provide success.

So the subsidy is some kind of financial support that government gives to companies. The money financial, they give money as a support so that the company gets the subsidy for free from the government for the production. So suppose Boeing is a U.S. company and Airbus is an EU company. So if the U.S. government suppose provides

What if the U.S. government decided to provide subsidies to Boeing of $20 million, for example? Then, usually subsidies are production subsidies, so if you produce, the government is going to be a production subsidy. Usually, the government uses that kind of production subsidy in order to encourage production of the domestic parts.

So suppose the US government really wants their company to produce, suppose the US government provides a production subsidy of 20 to Boeing. If that is the case, Boeing is going to receive 20 if and only if it produces. If Boeing does not produce, it is not going to receive subsidy from the government the government provides subsidy in order to produce something.

So if Boeing produced, then it's going to receive plus 20 on top of whatever the profit or loss that they have. So instead of minus 5, it's going to be plus 15 for Boeing. And instead of 100, it's going to be 120 for Boeing if it receives government subsidies. If outcome looks like this,

Minus 5, 15. 100, 0. 0, 120, 0, 0. What would be the outcome in this case? For Boeing, no matter what all of us chooses, 15 is always better than 0. 120 is always better than 0. So no matter what, we know for sure that Boeing is going to choose this one. going and going to produce because even if

On its own it's going to make a lot, but government provides a subsidy of 20 so that they're going to make money, whatever the market is. So Boeing is going to choose production for sure. Knowing that Boeing is going to produce for sure, what would be the optimal choice for Airbus? Knowing that this is the choice that Boeing makes, then Airbus is going to be choosing if produced,

minus 5, if 2.0 is 0. So 0 is better than minus 5, so that this one is going to be the final outcome, under subsidy. Whenever there is a subsidy, this is going to be the outcome. But without the subsidy, this or this, we had a 50/50 chance. So when government does not do anything, then we have a 50/50 chance that the US could take this 100, or the EU could take this 100.

Well once government provides subsidy of 20, it doesn't have to be 20, it could be just a plus 6. Because as long as greater than minus 5, so that it's greater than 0, this option is going to be preferred to this one. So as long as government provides a small amount of subsidy that covers the loss, then Boeing is going to always produce, and knowing that one is going to produce for sure,

We know the choice that Airbus is doing today, so that rather than 50/50 chance, we have a 100% chance of having this one as our current. Then what happens is, for the country as a whole, U.S. government is going to spend minus 20, right? This is a government expenditure. So this is spending for the government, U.S. government. So that's going to have 120.

country as a whole is going to be better off by 100. Government spend 20 more but company makes 120 more than before so the net is going to be 100 positive 100 for the United States. So in this case government actually has a role to assisting its home company to actually have a some kind of upper hand advantage in the market. So this new trading theory then

Unlike the ricardian model, unlike factor proportions model where government doesn't have to do anything, government doesn't need to intervene, but the company, the producers and consumers are going to just compete in the free market and it's going to result in the most efficient outcome. But unlike that, in new trading theory that there is a role that government can play or government can actually intervene and that could actually make the country better off.

So that's what the new trading theory is essentially saying. So rather than each country producing a large set of goods in a smaller scale, it's better to specialize and exploit the economies of scale. And in certain cases, when there is some kind of strategy that is needed in order to capture the whole market, then government can actually do something.

So this is a new trading theory that actually emerged after 1970s and 80s. So this new trading theory actually focuses on this first mover advantage. Any company that enters the market has a first mover advantage. So in that case, Boeing enters the market first or if any kind of, it doesn't have to be that kind of situation, but if you actually enter the market first,

Then in that case, you capture the market share, and then once you have a market share, then you have a greater advantage over other newcomers. In that case, you want to actually support those industries in the beginning, government could actually provide infrastructure or R&D support or production subsidies or whatever the support that government can do. So in that case, they could actually form some kind of entry, some kind of a barrier to entry so that there is no potential rivals. So potential rivals are not going to enter so that this particular company or firm can actually enjoy some kind of monopoly.

is where there's only one firm in the industry so that they can pretty much charge higher price and capture the whole market. Or in some cases, only Gopoli, where there are few firms in the market. So that unlike the case where there are many firms in the market, then the competition is going to be greater so that firms have a smaller profit. But whenever we have one firm or very small number of firms, then they can have a greater problem.

So that in this case, countries can actually dominate in certain industries because they could actually provide, government can actually provide some kind of a first removal advantage by providing subsidies or other benefits that companies can actually enjoy. So there's a new trading theory actually focused on this first removal advantage and in order to do that they are trying to use government intervention more actively compared to

You could think of this new trading theory as more of a strategy policy, not just something that we read at the free market. Any questions about new trading theory? Okay, then we are going to move on to the last trade model that we are going to discuss in this class.

And the name is National Competitive Advantage. National competitive advantage is similar in the sense that a country who can do better