Ebook International trade theory amp; policy (11/E): Part 2
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Ebook International trade theory amp; policy (11/E): Part 2
External Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2ize and trade. First, countries differ either in their resources or in their technology and specialize in the things they do relatively well; second, economies of scale (or increasing returns) make it advantageous for each country' to specialize in the production of only a limited range of goods and Ebook International trade theory amp; policy (11/E): Part 2 services. Chapters 3 through 6 considered models in which all trade is based on comparative advantage; that is, differences lx?tween countries are thEbook International trade theory amp; policy (11/E): Part 2
e only reason for trade. This chapter introduces the role of economies of scale.The analysis of trade based on economies of scale presents certain proExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2, when there are increasing returns, however, large firms may have an advantage over small ones, so that markets tend to be dominated by one firm (monopoly) or, more often, by a few firms (oligopoly). If this happens, our analysis of trade has to take into account the effects of imperfect competitio Ebook International trade theory amp; policy (11/E): Part 2n.However, economies of scale need not lead to imperfect competition if they take the form of external economies, which apply at the level of the induEbook International trade theory amp; policy (11/E): Part 2
stry rather than at the level of the individual firm. In this chapter, we will focus on the role of such external economies of scale in trade, reserviExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2e often occurs from increasing returns to scale.•Understand the differences between internal and external economies of scale.•Discuss the sources of external economies.■ Discuss the roles of external economies and knowledge spillovers in shaping comparative advantage and international trade patterns Ebook International trade theory amp; policy (11/E): Part 2.173www.downloadslide.net174 PARTONE ■ International Trade TheoryEconomies of Scale and International Trade: An OverviewThe models of comparative advaEbook International trade theory amp; policy (11/E): Part 2
ntage already presented were based on the assumption of constant returns to scale. That is. we assumed that if inputs to an industry were doubled, indExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2ns), so that production is more efficient the larger the scale at which it takes place. Where there arc economies of scale, doubling the inputs to an industry will more than double the industry’s production.A simple example can help convey the significance of economics of scale for international tra Ebook International trade theory amp; policy (11/E): Part 2de Table 7-1 shows the relationship between input and output of a hypothetical industry. Widgets arc produced using only one input, labor; the table sEbook International trade theory amp; policy (11/E): Part 2
hows how the amount of labor required depends on the number of widgets produced. To produce 10 widgets, for example, requires 15 hours of labor, whileExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2more than doubles the industry’s output—in fact, output increases by a factor of 2.5. Equivalently, the existence of economics of scale may be seen by looking at the average amount of labor used to produce each unit of output: If output is only 5 widgets, the average labor input per widget is 2 hour Ebook International trade theory amp; policy (11/E): Part 2s, while if output is 25 units, the average labor input falls to 1.2 hours.We can use this example to sec why economics of scale provide an incentiveEbook International trade theory amp; policy (11/E): Part 2
for international trade. Imagine a world consisting of two countries, the United Stalesand Britain, both of which have the same technology for produciExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2rld as a whole. 30 hours of labor produce 20 widgets. But now suppose we concentrate world production of Widgets in one country, say the United States, and let the United States employ 30 hours of labor in the widget industry In a single country, these 30 hours of labor can produce 25 widgets. So by Ebook International trade theory amp; policy (11/E): Part 2 concentrating production of widgets in the United States, the world economy can use the same amount of labor to produce 25 percent more widgets.But wEbook International trade theory amp; policy (11/E): Part 2
here docs the United States find the extra labor to produce widgets, and what happens to the labor that was employed in the British widget industry? TExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2produced in Britain instead, using the labor formerly employed in the industries whose production has expanded in the United States. Imagine there are many goods subject to economies of scale in production. and give them numbers 1.2. 3.... To take advantage of economics of scale, each of the countri Ebook International trade theory amp; policy (11/E): Part 2es must concentrate on producing only a limited number of goods. Thus, for example, the United States might produce goods 1.3. 5. and so on. while BriEbook International trade theory amp; policy (11/E): Part 2
tainr TABLE 7-1Relationship of Input to Output for a Hypothetical Industry( hltputTotal Labor InputAverage Labor Input510210151.515201.33333320251.252External Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 25produces 2.4.6. and so on. If each country produces only some of the goods, then each good can be produced al a larger scale than would be the ease if each country tried to produce everything. As a result, the world economy can produce more of each good.How does international trade enter the story? Ebook International trade theory amp; policy (11/E): Part 2 Consumers in each country will still want to consume a variety of goods. Suppose industry I ends up in the United States and industry 2 ends up in BrEbook International trade theory amp; policy (11/E): Part 2
itain; then American consumers of good 2 will have to buygoods imported from Britain, while British consumers of good 1 will have to import it from thExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2vantage of economies of scale without sacrificing variety in consumption. Indeed, as we will see in Chapter 8. international trade typically leads to an increase in the variety of goods available.Our example, then, suggests how mutually beneficial trade can arise as a result of economies of scale. E Ebook International trade theory amp; policy (11/E): Part 2ach country specializes in producing a limited range of products, which enables it to produce these goods more efficiently than if it tried to produceEbook International trade theory amp; policy (11/E): Part 2
everything for itself; these specialized economics then trade with each other to be able to consume the full range of goods.Unfortunately, to go fromExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2 a market structure other than that of perfect competition, and we need to be careful about analyzing this market structure.Economies of Scaie and Market StructureIn the example in Table 7-1. we represented economics of scale by assuming the labor input per unit of production is smaller the more uni Ebook International trade theory amp; policy (11/E): Part 2ts produced; this implies that at a given wage rate per hour, the average cost of production falls as output rises. We did not say how this productionEbook International trade theory amp; policy (11/E): Part 2
increase was achieved whether existing firms simply produced more, or whether there was instead an increase in the number of firms. To analyze the efExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2. External economies of scale occur when the cost per unit depends on the size of the industry but not necessarily on the size of any one firm. Internal economies of scale occur when the cost per unit depends on the size of an individual firm but not necessarily on that of the industry.The distincti Ebook International trade theory amp; policy (11/E): Part 2on between external and internal economies can be illustrated with a hypothetical example. Imagine an industry that initially consists of 10 firms, eaEbook International trade theory amp; policy (11/E): Part 2
ch producing 100 widgets, for a total industry production of I.OCX) widgets. Now consider two cases. First, suppose the industry were to double in sizExternal Economies of Scale AND THE International Location OF ProductionIn Chapter 3, we pointed out that there are two reasons why countries speciali Ebook International trade theory amp; policy (11/E): Part 2 increased size of the industry; for example, a bigger industrymay allow more efficient provision of specialized services or machinery. If this is the case, the industry exhibits external economics of scale. That is. the efficiency of firms is increased by having a larger industry, even though each Ebook International trade theory amp; policy (11/E): Part 2firm is the same size as before.Second, suppose the industry's output is held constant at 1.000 widgets, but that the number of firms is cut in half sEbook International trade theory amp; policy (11/E): Part 2
o that each of the remaining five firms produces 2(M) widgets. If the costs of production fall in this case, then there are internal economies of scalGọi ngay
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