Scale Economies, imperfect competition and trade

1. Scale Economies, imperfect competition and trade

2. http://www.census.gov/foreign-trade/statistics/country/

3. Calculating IIT

4. What are some examples? US trade data at: http://www.ita.doc.gov/td/industry/otea/trade-detail/

5. 2 questions1. How important is IIT in non-food mfg for different countries?

6. 2 questions2. Why is IIT so prevalent for industrial countries? • IIT is prevalent where trade barriers and transportation costs are low • IIT is prevalent in higher income countries: higher income generates taste for variety • IIT is driven by (BASIS for ANALYSIS): • Role of product differentiation • Role of scale economies • Constant economies of scale: • long-run average total cost stays the same as the quantity of output changes. • total cost  in the same proportion as output  • Scale economies (economies of scale) • long-run average total cost  as the quantity of output  • total cost  as output 

7. 1st Source of Scale Economies • Internal Scale Economies or internal economies of scale • Sources of internal economies of scale • Fixed cost of production • Increasing returns to scale • Results of internal scale economies • Modest scale economies: monopolistic competition • Large scale economies: oligopoly

8. 2nd Source of Scale Economies 2. External Scale Economies or external economies of scale • Sources of internal economies of scale • Emergence of specialized input suppliers • Benefits of a common pool of specialized workers • Knowledge spillovers

9. Explaining IIT with modest internal scale economies: Monopolistic Competition

10. 3 characteristic of Monopolistic Competition • Large number of producers. • Product differentiation. • Free entry/exit in the long run.