Question

How does increasing returns to scale lead to gains from trade under monopolistic competition?

Answer 1

An increasing returns to scale occurs when the output increases by a larger proportion than the increase in inputs during the production process.The Monopolistic competition model in international trade predicts that consumer gains from new import varieties of differentiated products, monopolistic competition allows gains from a reduction in firm markups due to import competition,the gains from trade depend on one minus the share of expenditure on imports , the monopolistic competition model allows for gains from a reductio in firms markups due to import competition.

The main reason the presence of economies of scale can generate trade gains is because the reallocation of resources can raise world productive efficiency. The monopolistic competition allows for the presence of increasing returns to scale in production and for differentiated product which is hetrogenious.The idea of free entry and exit of firms in response to profit would eliminate economic profit among the firms, model is useful in explaing the trade between countries that occurs within an industry rather than industries There are economies of scale in production ,An increase the effect of international trade on the number of varieties of a good available to consumers in monopolistically competitive market, trade effect on productive efficiency of firms remaining in business in a monopolistic competitive market.