Question

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Question 1

In the following examples, do you believe that the main driving force for the location of

production is economies of scale or comparative advantage:

a) The presence of two automotive companies, Volvo and Saab, in Sweden.

b) The presence of a textile industry in Bangladesh.

c) The large number of coffee growers in Tanzania and Kenya on the slopes of Kiliman- jaro.

d) That 70% of all lighters in the world are produced in the Chinese city of Wenzhou.

e) The many nightclubs around Stureplan in Stockholm compared to, for example,Gärdet.

Question 2

Imagine that Vietnam would close its trade in buttons

with other countries. Would prices in Vietnam increase or decrease? (Hint: this depends

on the size of the Vietnamese domestic demand).

Question 3

Consider, again,. Assume that Vietnam maintains free trade in

buttons but that its current output in this industry is zero due to competition from China.

Now, the Vietnamese government decides to subsidise its button industry (this causes

Vietnam’s supply curve to shift downwards). Will this be successful? What does it depend

Answer 1

Question 1 answered:

External economies of scale happens because of industry going big. Hence skilled labor is available in that area, and also other production facilities support businesses.

Comparative advantage is when opportunity cost of producing something is less.

a. The presence of two automotive companies, Volvo and Saab, in Sweden: This happens due to economies of scale. Industry locates due to all favourable factors of production.

b) The presence of a textile industry in Bangladesh: Comparative advantage: When labor is more productive, other natural factors are also favourable.

c) The large number of coffee growers in Tanzania and Kenya on the slopes of Kiliman- jaro: Comparative advantage: Land, labor is naturally more. productive.

d) That 70% of all lighters in the world are produced in the Chinese city of Wenzhou: Economies of scale.

e) The many nightclubs around Stureplan in Stockholm compared to, for example,Gärdet: Comparative advantage. This happens as other businesses may give less returns.