Question

Consider the classical model, standard model, the models with external economies of scale, the model with external and internal economies of scale (heterogenous firms). Assume that there are only two countries and two products in this model.

A) List the models that predict that world prices are going to be less than autarky prices should countries in our model open up to trade

B) List the models that predict that trade would lead to a productivity gain. Make sure that you describe the differences between these two models.

Answer 1

1. Classical Model

The model with external economies of scale

2. Standard Model

The model with external and internal economies of scale

An internal economy of scale measures a company's efficiency of production. That efficiency is attained as the company improves output when the average cost per product drops. This type of economy of scale is a consequence of a company's size and is controlled by its management teams such as workforce, production measures, and machinery. The factors, therefore, are independent of the entire industry.

External economies of scale are generally described as having an effect on the whole industry. So when the industry grows, the average costs of business drop. External economies of scale can happen because of positive and negative externalities. Positive externalities include a trained or specialized workforce, relationships between suppliers, and/or more innovation. Negative ones happen at the industry levels and are often called external diseconomies.