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Part 2 book “International trade theory & policy” has contents: External economies of scale and the international location of production, the instruments of trade policy , the political economy of trade policy, trade policy in developing countries, controversies in trade policy, and other contents. | www.downloadslide.net 7 CHAPTER External Economies of Scale and the International Location of Production I n Chapter 3, we pointed out that there are two reasons why countries specialize 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 services. Chapters 3 through 6 considered models in which all trade is based on comparative advantage; that is, differences between countries are the only reason for trade. This chapter introduces the role of economies of scale. The analysis of trade based on economies of scale presents certain problems that we have avoided so far. Until now, we have assumed markets are perfectly competitive, so that all monopoly profits are always competed away. 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 competition. 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 industry 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, reserving the discussion of internal economies for Chapter 8. LEARNING GOALS After reading this chapter, you will be able to: ■■ ■■ ■■ ■■ Recognize why international trade 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 .
