Question

Use a diagram to explain the significance of increasing returns to scale and product differentiation for international trade

Answer 1

Increasing returns to scale refers to the condition where output increases with double then output. For eg if input is increasing by 1 unit then output will be increasing by 2units.

 The above diagram clearly shows how slight change in input cause massive change output, this actually becomes cost efficient for the firm and this also saves lot of time and efforts because now it's not needed to invest the time in training the employee and making them efficient to work.

Product differentiation for international trade

The concept has been explained by Chamberlin-Hecksher-Ohlin approach where he states that

A capital rich country produce capital intensive goods and labour intensive country produces labour intensive goods and sports both the goods to each other. But it is impossible to predict people's demand choices and preference of the people in any country, therefore when differentiated product are produced with homothetic production function and consumer spending fixed budget on shares of the good relative factor reward can be used to predict intersectional pattern of trade.