Question

How can economies of scale affect world trade patterns? What affect does it have on a firm's decision to "outsource" and/or "Go-off-shore?"

Answer 1

Economies of scale has a major impact in determining the world trade patterns , especially with the current market pattern , where market is operating freely , without any interference from any body.

The rule of the ground is profit generation and maximisation , capturing of market through competition and multiplayers in operation and expansion , as much as possible.

The question is how world trade patterns are determined by economies of scale. Economies of scale works when a firm enjoys cost reduction as they expand and the same plant can produce more given the resources. Also economies of scale enables an expansion of technology which also reduces the cost of production.

When a company operates with advantages of economies of scale, their prices fall in competitive market and the good substitute the other competitors in the economy. This creates a gradual monopoly for the company. It is observed that this situation was possible only in places where big investors are present and these big investors install their plants where the labour is cheap , hence generating super normal profits. These countries with cheap labours , are usually underdeveloped or developing , are the production heads of the world , while the owners of these big companies are from first world nations , where per capita income is high and the capitalist strive the most. The decision of a country to go off shore or outsource , is also placed around this low cost labour factor , in return the big giants produce enormous profits .