1.
2013/8/29(Sat)
Chapter7
External
Economies
of
Scale
and
the
Interna@onal
Loca@on
of
Produc@on
Interna@onal
Economics
theory
and
policy
1

2. Previous
contents
• Chapter1
Introduc@on
• Chapter2
World
trade:
An
overview
• Chapter3
Labor
produc@vity
and
compara@ve
advantage
– :The
Ricardian
model
• Chapter4
Specific
factors
and
Income
distribu@on
• Chapter5
Resources
and
trade
– :The
Heckscher-­‐Ohlin
model
• Chapter6
Standard
trade
model
2

3. Chapter1
Introduc@on
7
themes
recur
throughout
the
study
of
interna@onal
economic
1. The
gains
from
trade
2. The
paWern
of
trade
3. How
much
trade?
4. Balance
of
payments
5. Exchange
rate
determina@on
6. Interna@onal
policy
coordina@on
7. The
interna@onal
capital
markets
3

4. Chapter2
World
trade:
An
overview
• The
gravity
model
– The
trade
between
any
two
countries
is
propor@nal
to
the
products
of
their
GDP
and
diminishes
with
distance.
• Interna@onal
trade
is
at
record
levels
rela@ve
to
the
size
of
the
world
economy.
• Manufactured
goods
dominate
modern
trade
today.
– Developing
countries
have
shi^ed
from
being
mainly
exporters
of
primary
products
to
being
mainly
exporters
of
manufactured
goods.
4

5. How
much
trade?
• The
seemingly
eternal
debate
over
how
much
trade
allow
is
the
most
important
policy
theme.
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0
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40
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100
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2001
2002
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2004
2005
2006
2007
2008
2009
2010
2011
exports
import
net
exports
(Trillion
yen)
5

6. Chapter3
Labor
produc@vity
and
compara@ve
advantage
:The
Ricardian
model
• The
Ricardian
model
– Labor
is
the
only
factor
of
produc@on,
and
countries
differ
only
in
the
produc@vity
of
labor
in
different
industries.
– A
countries
produc@on
paWers
is
determined
by
compara@ve
advantage.
• Trade
benefits
a
country
in
either
of
two
ways.
– Instead
of
producing
a
good
for
itself,
a
country
can
produce
another
good
and
trade
it
for
the
desired
good.
– Trade
enlarges
a
countries
consump@on
possibili@es.
6

7. Chapter4
Specific
factors
and
Income
distribu@on
• Specific
factor
model
– Differences
in
resources
can
cause
countries
to
have
different
rela@ve
supply
curves,
and
thus
cause
interna@onal
trade.
– Factors
specific
to
export
sectors
in
each
country
gain
from
trade,
while
factors
specific
to
import-­‐compe@ng
sectors
lose.
Mobile
factors
that
can
work
in
either
sector
may
either
gain
or
lose.
• Interna@onal
trade
o^en
has
strong
effects
on
the
distribu@on
of
income
within
countries.
– Factors
cannot
move
instantaneously
and
costlessly
from
one
industry
to
another.
– Changes
in
an
economy’s
output
mix
have
differen@al
effects
on
the
demand
for
different
factors
of
produc@on.
7

8. Chapter5
Resources
and
trade
:The
Heckscher-­‐Ohlin
model
• Model
of
two-­‐factor
economy
– Two
countries,
two
goods,
two
factors
of
produc@on
• Heckscher-­‐Ohlin
theory
– Countries
tend
to
export
goods
that
are
intensive
in
the
factors
with
which
they
are
abundantly
supplied.
• The
owners
of
a
country’s
abundant
factors
gain
from
trade,
but
the
owners
of
scarce
factors
lose.
– There
are
s@ll
gains
from
trade,
in
the
limited
sense
that
that
winners
could
compensate
the
losers,
and
everyone
would
be
beWer
off.
8

9. Chapter6
• The
standard
trade
model
– The
rela@onship
between
the
produc@on
possibility
fron@er
and
the
rela@ve
supply
curve.
– The
rela@onship
between
rela@ve
prices
and
rela@ve
demand.
– The
determina@on
of
world
equilibrium
by
world
rela@ve
supply
and
world
rela@ve
demand.
– The
effect
of
the
terms
of
trade
9

10. Chapter7
External
Economies
of
Scale
and
the
Interna@onal
Loca@on
of
Produc@on
10

11. Learning
goals
• Recognizing
why
interna@onal
trade
o^en
occurs
from
increasing
returns
to
scale
• Understanding
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
compara@ve
advantage
and
interna@onal
trade
paWers.
11

12. Compara@ve
advantage
12
Compara@ve
advantages
Countries
differ
either
in
their
resources
or
in
their
technology
and
specialize
in
the
things
they
do
rela@vely
well.
Economies
of
scale
make
it
advantageous
for
each
country
to
specialize
in
the
produc@on
of
only
limited
range
of
goods
and
services

13. Economies
of
scale
and
interna@onal
trade:
An
overview
• The
models
of
compara@ve
advantage
were
based
on
the
assump@on
of
constant
returns
to
scale.
• To
take
advantage
of
economies
of
scale,
each
of
the
countries
must
concentrate
on
producing
only
a
limited
number
of
goods.
• It
makes
it
possible
for
each
country
to
produce
a
restricted
range
of
goods
and
to
take
advantage
of
economies
of
scale
without
sacrificing.
13
Table7-1 Relationship of input to out put for a Hypothetical industry
Output
Total labor input
Average labor of input
5
10
2.00
10
15
1.50
15
20
1.33
20
25
1.25
25
30
1.20
30
35
1.17

14. Economies
of
scale
and
market
structure
firms
producing
total industry production
Standard situations
10
100
1,000
External economies of scale
20
100
2,000
Internall economies of scale
5
200
1,000
14
• External
economies
of
scale
occur
when
the
cost
per
unit
depends
on
the
size
industry
but
not
necessarily
on
the
size
of
any
one
firm.
– An
industry
where
economies
of
scale
are
purely
external
will
typically
consist
of
many
small
firms
and
be
perfectly
compe@@ve.
• 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.
– Internal
economies
of
scale
give
large
firms
a
cost
advantage
over
small
firms
and
lead
to
an
imperfectly
compe@@ve
market
structure.

15. The
theory
of
external
economies
• Specialized
suppliers
– Ability
of
cluster
• Labor
market
pooling
– A
geographical
concentrated
industry
• Knowledge
spillovers
– A
geographical
concentrated
industry
15

16. External
economies
and
market
equilibrium
• When
there
are
external
economies
of
scale,
the
average
cost
of
producing
a
good
falls
as
the
quality
produced
rises.
• The
larger
the
industry’s
output,
the
lower
the
price
at
which
firms
are
willing
to
sell,
because
their
average
cost
of
produc@on
falls
as
industry
output
rises.
16

17. External
economies,
output,
and
prices
17
• 【Before
trade】
Chinese
buWon
prices
in
the
absence
of
trade
would
be
lower
than
U.S
buWon
prices.
•
【A^er
trade】
Chinese
buWon
industry
will
expand,
while
the
U.S.
buWon
industry
will
contract
:
As
Chinese
industry’s
output
rises,
its
cost
will
fall
further.
As
the
U.S.
industry’s
output
falls,
its
costs
will
rise.
• 【Chapter6】If
cloths
is
rela@vely
cheap in
Home
and
rela@vely

18. External
Economies
and
the
paWern
of
trade
18
• The
reason
for
determining
the
paWern
of
specializa@on
and
trade
in
industries
with
external
economies
of
scale
is
historical
con@ngency.
• Although
the
Vietnamese
industry
could
poten@ally
make
buWons
more
cheaply
than
China’s
industry,
China’s
head
start
enables
it
to
hold
on
to
the
industry.
• External
economies
poten@ally
give
a
strong
role
to
historical
accident
in
determining
who
produces
what,
and
may
allow
established
paWerns
of
specializa@on
to
persist
even
when
they
run
counter
to
compara@ve
advantage.

19. Trade
and
welfare
with
external
economies
19
• When
there
are
external
economies,
trade
can
poten@ally
leave
a
country
worse
off
than
it
would
be
in
the
absence
of
trade.
• While
external
economies
can
some@mes
lead
to
disadvantageous
paWerns
of
specializa@on
and
trade,
it’s
virtually
certain
that
it
is
s@ll
to
the
benefit
of
the
world
economy
to
take
advantage
of
the
gains
from
concentra@ng
industries.
• EX)City,
Frankfurt

20. Dynamic
increasing
returns
20
• When
an
individual
firm
improves
its
products
or
produc@on
techniques
through
experiences,
other
firms
are
likely
to
imitate
the
firm
and
benefit
from
its
knowledge.
• The
learning
curve
shows
that
unit
cost
is
lower
the
greater
the
cumula@ve
output
of
a
country’s
industry
to
date.
• Dynamic
scale
economies,
like
external
economies
at
a
point
in
@me,
poten@ally
jus@fy
protec@onism.
• The
argument
for
temporary
protec@on
of
industries
to
enable
them
to
gain
experience
is
known
as
the
infant
industry
argument.

21. Interregional
trade
and
economic
geography
21
Table7-2 Some examples of tradable and nontradable industries
Tradable industires
Nontradable industires
Motion pictures
Newspaper publishers
Securities, commodities, etc
Saving institutions
Scientific research
Veterinary services
• External
economies
play
an
important
role
in
shaping
the
paWern
of
interna@onal
trade,
but
they
are
even
more
decisive
in
shaping
the
paWern
of
interregional
trade.
• Determining
the
loca@on
of
tradable
industries,
in
some
cases,
natural
resources
play
a
key
role.
• Clusters
promote
localized
networking,
to
enhance
crea@vity.
• A
historical
accident
play
a
key
role
to
explain
how
a
par@cular
region
develops
the
external
economies
that
support
an
industry.