20130829 international economics chap7

 2013/8/29(Sat)  

Chapter7  External  Economies  of  Scale  and  the  Interna@onal  Loca@on  

of  Produc@on

Interna@onal  Economics    theory  and  policy  

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Previous  contents •  Chapter1  Introduc@on  

•  Chapter2  World  trade:  An  overview  

•  Chapter3  Labor  produc@vity  and  compara@ve  advantage  –  :The  Ricardian  model  

•  Chapter4  Specific  factors  and  Income  distribu@on  

•  Chapter5  Resources  and  trade  –  :The  Heckscher-­‐Ohlin  model    

•  Chapter6  Standard  trade  model

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Chapter1    Introduc@on

7  themes    recur  throughout  the  study  of  interna@onal  economic  

1.  The  gains  from  trade  2.  The  paWern  of  trade  3.  How  much  trade?  4.  Balance  of  payments  5.  Exchange  rate  determina@on  6.  Interna@onal  policy  coordina@on  7.  The  interna@onal  capital  markets  

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Chapter2    World  trade:  An  overview

•  The  gravity  model  –  The  trade  between  any  two  countries  is  propor@nal  to  the  products  of  

their  GDP  and  diminishes  with  distance.  

•  Interna@onal  trade  is  at  record  levels  rela@ve  to  the  size  of  the  world  economy.  

•  Manufactured  goods  dominate  modern  trade  today.  –  Developing  countries  have  shi^ed  from  being  mainly  exporters  of  

primary  products  to  being  mainly  exporters  of  manufactured  goods.  

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How  much  trade?

•  The  seemingly  eternal  debate  over  how  much  trade  allow  is  the  most  important  policy  theme.  

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exports   import   net  exports  

(Trillion  yen)

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Chapter3    Labor  produc@vity  and  compara@ve  advantage  

:The  Ricardian  model  

•  The  Ricardian  model  –  Labor  is  the  only  factor  of  produc@on,  and  countries  differ  only  in  the  

produc@vity  of  labor  in  different  industries.  –  A  countries  produc@on  paWers  is  determined  by  compara@ve  

advantage.  

•  Trade  benefits  a  country  in  either  of  two  ways.  –  Instead  of  producing  a  good  for  itself,  a  country  can  produce  another  

good  and  trade  it  for  the  desired  good.  –  Trade  enlarges  a  countries  consump@on  possibili@es.

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Chapter4    Specific  factors  and  Income  distribu@on

•  Specific  factor  model  –  Differences  in  resources  can  cause  countries  to  have  different  rela@ve  

supply  curves,  and  thus  cause  interna@onal  trade.  –  Factors  specific  to  export  sectors  in  each  country  gain  from  trade,  

while  factors  specific  to  import-­‐compe@ng  sectors  lose.  Mobile  factors  that  can  work  in  either  sector  may  either  gain  or  lose.  

•  Interna@onal  trade  o^en  has  strong  effects  on  the  distribu@on  of  income  within  countries.  –  Factors  cannot  move  instantaneously  and  costlessly  from  one  industry  

to  another.  –  Changes  in  an  economy’s  output  mix  have  differen@al  effects  on  the  

demand  for  different  factors  of  produc@on.  

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Chapter5    Resources  and  trade  

:The  Heckscher-­‐Ohlin  model   •  Model  of  two-­‐factor  economy  

–  Two  countries,  two  goods,  two  factors  of  produc@on  

•  Heckscher-­‐Ohlin  theory  –  Countries  tend  to  export  goods  that  are  intensive  in  the  factors  with  which  they  are  abundantly  supplied.  

•  The  owners  of  a  country’s  abundant  factors  gain  from  trade,  but  the  owners  of  scarce  factors  lose.  –  There  are  s@ll  gains  from  trade,  in  the  limited  sense  that  that  winners  could  compensate  the  losers,  and  everyone  would  be  beWer  off.

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Chapter6  

•  The  standard  trade  model  –  The  rela@onship  between  the  produc@on  possibility  fron@er  and  the  rela@ve  supply  curve.  

–  The  rela@onship  between  rela@ve  prices  and  rela@ve  demand.  

–  The  determina@on  of  world  equilibrium  by  world  rela@ve  supply  and  world  rela@ve  demand.  

–  The  effect  of  the  terms  of  trade  

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Chapter7

External  Economies  of  Scale  and  the  Interna@onal  Loca@on  of  Produc@on

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Learning  goals •  Recognizing  why  interna@onal  trade  o^en  occurs  from  

increasing  returns  to  scale  

•  Understanding  the  differences  between  internal  and  external  economies  of  scale  

•  Discuss  the  sources  of  external  economies  

•  Discuss  the  roles  of  external  economies  and  knowledge  spillovers  in  shaping  compara@ve  advantage  and  interna@onal  trade  paWers.  

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Compara@ve  advantage

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Compara@ve  advantages

Countries  differ  either  in  their  resources  or  in  their  technology  and  specialize  in  the  things  they  do  rela@vely  well.

Economies  of  scale  make  it  advantageous  for  each  country  to  specialize  in  the  produc@on  of  only  limited  range  of  goods  and  services

Economies  of  scale  and  interna@onal  trade:  An  overview

•  The  models  of  compara@ve  advantage  were  based  on  the  assump@on  of  constant  returns  to  scale.  

•  To  take  advantage  of  economies  of  scale,  each  of  the  countries  must  concentrate  on  producing  only  a  limited  number  of  goods.  

•  It  makes  it  possible  for  each  country  to  produce  a  restricted  range  of  goods  and  to  take  advantage  of  economies  of  scale  without  sacrificing.

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Table7-1 Relationship of input to out put for a Hypothetical industry

Output Total labor input Average labor of input

5 10 2.00

10 15 1.50

15 20 1.33

20 25 1.25

25 30 1.20

30 35 1.17

Economies  of  scale  and    market  structure

　 firms producing total industry production

Standard situations 10 100 1,000

External economies of scale 20 100 2,000

Internall economies of scale 5 200 1,000

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•  External  economies  of  scale  occur  when  the  cost  per  unit  depends  on  the  size  industry  but  not  necessarily  on  the  size  of  any  one  firm.  –  An  industry  where  economies  of  scale  are  purely  external  will  typically  consist  of  many  

small  firms  and  be  perfectly  compe@@ve.  

•  Internal  economies  of  scale  occur  when  the  cost  per  unit  depends  on  the  size  of  an  individual  firm  but  not  necessarily  on  that  of  the  industry.  –  Internal  economies  of  scale  give  large  firms  a  cost  advantage  over  small  firms  and  lead  

to  an  imperfectly  compe@@ve  market  structure.  

The  theory  of  external  economies •  Specialized  suppliers  

–  Ability  of  cluster  •  Labor  market  pooling  

–  A  geographical  concentrated  industry  •  Knowledge  spillovers  

–  A  geographical  concentrated  industry  

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External  economies  and    market  equilibrium

•  When  there  are  external  economies  of  scale,  the  average  cost  of  producing  a  good  falls  as  the  quality  produced  rises.  

•  The  larger  the  industry’s  output,  the  lower  the  price  at  which  firms  are  willing  to  sell,  because  their  average  cost  of  produc@on  falls  as  industry  output  rises.  

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External  economies,  output,    and  prices

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•  【Before  trade】  Chinese  buWon  prices  in  the  absence  of  trade  would  be  lower  than  U.S  buWon  prices.  

•   【A^er  trade】  Chinese  buWon  industry  will  expand,  while  the  U.S.  buWon  industry  will  contract  :  As  Chinese  industry’s  output  rises,  its  cost  will  fall  further.  As  the  U.S.  industry’s  output  falls,  its  costs  will  rise.  

•  【Chapter6】If  cloths  is  rela@vely  cheap　in  Home  and  rela@vely    

External  Economies    and  the  paWern  of  trade

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•  The  reason  for  determining  the  paWern  of  specializa@on  and  trade  in  industries  with  external  economies  of  scale  is  historical  con@ngency.  

•  Although  the  Vietnamese  industry  could  poten@ally  make  buWons  more  cheaply  than  China’s  industry,  China’s  head  start  enables  it  to  hold  on  to  the  industry.  

•  External  economies  poten@ally  give  a  strong  role  to  historical  accident  in  determining  who  produces  what,  and  may  allow  established  paWerns  of  specializa@on  to  persist  even  when  they  run  counter  to  compara@ve  advantage.  

Trade  and  welfare    with  external  economies

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•  When  there  are  external  economies,  trade  can  poten@ally  leave  a  country  worse  off  than  it  would  be  in  the  absence  of  trade.  

•  While  external  economies  can  some@mes  lead  to  disadvantageous  paWerns  of  specializa@on  and  trade,  it’s  virtually  certain  that  it  is  s@ll  to  the  benefit  of  the  world  economy  to  take  advantage  of  the  gains  from  concentra@ng  industries.  •  EX)City,  Frankfurt  

Dynamic  increasing  returns

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•  When  an  individual  firm  improves  its  products  or  produc@on  techniques  through  experiences,  other  firms  are  likely  to  imitate  the  firm  and  benefit  from  its  knowledge.  

•  The  learning  curve  shows  that  unit  cost  is  lower  the  greater  the  cumula@ve  output  of  a  country’s  industry  to  date.  

•  Dynamic  scale  economies,  like  external  economies  at  a  point  in  @me,  poten@ally  jus@fy  protec@onism.  

•  The  argument  for  temporary  protec@on  of  industries  to  enable  them  to  gain  experience  is  known  as  the  infant  industry  argument.  

Interregional  trade    and  economic  geography

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Table7-2 Some examples of tradable and nontradable industries

Tradable industires Nontradable industires

Motion pictures 　 Newspaper publishers

Securities, commodities, etc Saving institutions

Scientific research 　 Veterinary services

•  External  economies  play  an  important  role  in  shaping  the  paWern  of  interna@onal  trade,  but  they  are  even  more  decisive  in  shaping  the  paWern  of  interregional  trade.  

•  Determining  the  loca@on  of  tradable  industries,  in  some  cases,  natural  resources  play  a  key  role.  

•  Clusters  promote  localized  networking,  to  enhance  crea@vity.  •  A  historical  accident  play  a  key  role  to  explain  how  a  par@cular  region  

develops  the  external  economies  that  support  an  industry.