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International Economics: Theory and PolicyEleventh EditionChapter 7External Economies of Scale and the International Location of ProductionCopyright ? 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved
Learning Objectives7.1 Recognize why international trade often occurs from increasing returns to scale.7.2 Understand the differences between internal and external economies of scale.7.3 Discuss the sources of external economies.7.4 Discuss the roles of external economies and knowledge spillovers in shaping comparative advantage and international trade patterns.
PreviewTypes of economies of scaleEconomies of scale and market structureThe theory of external economiesExternal economies and international tradeDynamic increasing returnsInternational trade and economic geography
Introduction (1 of 4)The models of comparative advantage thus far assumed constant returns to scale:When inputs to an industry increase at a certain rate, output increases at the same rate.If inputs were doubled, output would double as well.
Introduction (2 of 4)But there may be increasing returns to scale or economies of scale:This means that when inputs to an industry increase at a certain rate, output increases at a faster rate.A larger scale is more efficient: the cost per unit of output falls as a firm or industry increases output.
Introduction (3 of 4)For example, suppose an industry produces widgets using only one input, labor.Consider how the amount of labor required depends on the number of widgets produced.The presence of economies of scale may be seen from the fact thatdoubling the input of labor more than doubles the industry’s output.the average amount of labor used to produce each widget is less when the industry produces more.
Table 7.1 Relationship of Input to Output for a Hypothetical IndustryOutputTotal Labor InputAverage Labor Input 510 21015 1.51520 1.3333332025 1.252530 1.23035 1.16667
Introduction (4 of 4)Mutuall
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