Question

Suppose there exists external economies of scale in an industry located in country X. If country X moves from free trade to autarky, it necessarily loses welfare. Explain in detail, using any relevant diagrams, whether the above statement is true, false or uncertain.

Answer 1

There is complimentary trade. The Supply in the open market is revealed by Supply (open). The demand is a domestic need. The equilibrium point is E1, the price is P1 and the quantity is Q1. The total welfare in this state is the area of the triangle AE1B. Now the country relocates to Autarky. Autarky is the state of total self-dependence. The nation will not trade with anybody else. it is considered that there are external economies of scale. This suggests that the local market is not as efficient in producing the product as external. This will lead to a decline in supply. The supply curve shifts to the left and is shown as Supply (autarky). E2 is the brand-new balance point with price P2 and quantity Q2. The price is higher and the amount is lower. The overall welfare now is the area of the triangle AE2C. The important thing to be kept in mind is that the demand curve will not move. This means is that the brand-new welfare location triangle will always be a subset of the earlier well-being triangle (when the economy was open). This indicates this new triangle will always have a location lesser than the original which suggests that the new well-being will constantly be lower. For this reason, there will necessarily be a loss of well-being from the economy moves from open to autarky and there are external economies of scale.