Question

In a model of dynamic increasing returns, illustrate a and briefly explain using words. In this scenario, France protects its cotton industry with a temporary blockade, but after the blockade ends the protection is not enough for France to retain an advantage in cotton production, and once UK cotton is no longer blockaded, that the UK will recover its initial advantage. Be sure to draw and label any necessary learning curves (UK and France), and any relevant points on the curves.

Answer 1

In economics, returns to scale and long run average total cost are related but different concepts that describe what happens as the scale of production increases in the long run, when all input levels including physical capital usage are variable (chosen by the firm. The concept of returns to scale arises in the context of a firm's production function. It explains behavior of the rate of increase in output (production) relative to the associated increase in the inputs (the factors of production) in the long run. In the long run all factors of production are variable and subject to change due to a given increase in size (scale). While economies of scale show the effect of an increased output level on unit costs, returns to scale focus only on the relation between input and output quantities.if output increases by more than the proportional change in all inputs, there are increasing returns to scale (IRS).

in the given example,In many ways, industrialisation in France, in which the mechanisation of cotton spinning played an important role, is also representative of the development path that many countries have followed as large parts of their workforces move out of agriculture and into manufacturing. This suggests that similar forces could be at work in countries hoping to industrialise in the twenty­first century.

But a number of important qualifications are needed before translating the findings from this episode into policy prescriptions. Initial income differences between nineteenth century Britain and France were small in comparison with differences between rich and poor countries today. On the one hand, this suggests that mechanisms that inhibit countries from moving into certain sectors may be even more significant in modern settings.

On the other hand, small initial differences also meant that the conditions necessary for fostering modern industrial production were already in place prior to the Napoleonic wars. One reason why infant industry protection in practice may often fail is that policy­makers try to foster industries for which their country does not have the necessary underlying conditions.A further difficulty in translating the findings in this setting to direct policy protection from British competition on mechanisation in France was made possible by the fact that protection was not a result of economic policy. In practice however, infant industry protection is almost always the result of political intervention in the economy. Another important reason for so many failed infant industry projects may be the fact that the political process is captured by special interests. As such, resources may be allocated not towards sectors in which the country has high growth potential, but rather, towards sectors in which the economy cannot and will not be able to compete in the future.