Question

Economies of scale is one of the causes of international trade. Expound on what it is. Furthermore, explicate how the evidence supports this theory of trade. Apply the theory to one case, as a minimum.

Answer 1

Economies of. scale mean that more. output can be. achieved at a. lower cost. When production. within an industry has .this characteristic, specialization. and trade can. result in improvements. in world. productive. efficiency and welfare. benefits that. accrue to all. trading. countries.

Cost to produce 10,000 cars = 80,000                   Cost per car = 8,000

Cost to produce 25,000 cars = 175,000 Cost per car = 7,000(example of economies of scale)

Chinese .button prices. were lower. than U.S. button. prices before. the trade. Because. China?s supply. curve is forward-falling, increased. production as. a result of. trade leads. to a button. price that is. lower than the. price before. the trade. Trade leads. to prices that. are lower than. the prices in. either country. before. trade This is an example. of external. economy of trade. which aims. to reduce the price. in both the countries. after the. trade. In reality, firms. mostly create. differentiated products. This means. that they. are being monopolistically competitive. In this, more. realistic. scenario, economies of scale. will not. allow for. the efficient. production of. a full range. of manufacturers. in each country. Therefore. each country. will produce some. manufacturers but will. manufacture different. things.

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