shipped across the oceans to and from the United States, the European Union, and Japan? There are two

reasons: (1) The division of labor leads to learning, innovation, and unique skills; and (2) economies of scale.

Gains from Specialization and Learning

Consider the category of machinery, where the U.S. economy has considerable intra-industry trade. Machinery

comes in many varieties, so the United States may be exporting machinery for manufacturing with wood, but

importing machinery for photographic processing. The underlying reason why a country like the United

States, Japan, or Germany produces one kind of machinery rather than another is usually not related to U.S.,

German, or Japanese firms and workers having generally higher or lower skills. It is just that, in working on

very specific and particular products, firms in certain countries develop unique and different skills.
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