preference-similarity theory

Preference-similarity theoryclick for a larger image
Fig. 146 Preference-similarity theory. Leading exporters and importers of automotive products 2002. Source: WTO Annual Report 2003.

preference-similarity theory

an explanation of INTERNATIONAL TRADE in manufactured products that is based on consumers’ demands for product variety and PRODUCT DIFFERENTIATION, for example, the EXPORT from the UK of cars to, and the import of cars from, Germany. As Fig. 146 shows, the main exporters of automotive products are, on the whole, also the main importers of such products.

The theory postulates that domestic suppliers specialize in the manufacture of the kinds of product demanded by the majority of domestic consumers but are able to export some of their output to countries where such products appeal to a minority of consumers. By the same token, the minority of domestic consumers have slightly different demands, demands that can be satisfied by imports from those countries where such tastes are those of the majority. Since the kinds of product demanded in a country are determined in large measure by the level of income per head, most exchanges of manufactures take place between countries of a similar industrial structure, each exporting and importing essentially similar products. Through trade, the variety of manufactured products available to consumers is extended, and the gain from trade derives not from lower prices, as emphasized by the conventional theory of COMPARATIVE ADVANTAGE, but from the choice of being able to consume the precise brand or variety of product demanded. See also INTRA-INDUSTRY TRADE, THEORY OF INTERNATIONAL TRADE.