International Economics: Learning Goals
International Economics: Learning Goals
International Economics: Learning Goals
CHAPTER S I X
6 International Economics
Tenth Edition
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
Learning Goals:
Explain how international trade can result from
economies of scale
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6.1 Introduction
Introduction
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Assumptions
(1) There are two nations (N1, N2) two commodities (X, Y)
(2) Both nations use the same technology in production.
(3) Both nations have the same amount of resources.
(4) Neither commodity is labor intensive or capital intensive.
(5) Both commodities are produced under increasing returns
to scale in both nations.
- i.e., Output grows proportionately more than the increase in inputs
of production. (eg., If all inputs are doubled, output is more than
doubled: Economies of scale.)
This is a type of trade that the H–O model does not explain.
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The presence of economies of scale may be seen from the fact that doubling
the input of labor from 15 to 30 more than doubles the industry's output - in
fact, output increases by a factor of 2.5.
Equivalently, the existence of economies of scale may be seen by looking at
the average amount of labor used to produce each unit of output: If output is
only 5 widgets, the average labor input per widget is 2 hours, while if output
is 25 units, the average labor input falls to 1 .2 hours.
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Outsourcing
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intra-industry trade
•in differentiated
products
inter-industry trade
• in completely different
products.
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Exchange of differentiated
products of the same
industry
Intra-industry trade in
differentiated products
Economies of scale in
production.
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Semiconductor
Investment banking
industry in
industry in New
California's famous
York
Silicon Valley
the entertainment
industry in
Hollywood.
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SUMMARY
Trade need not be the result of comparative
advantage. Instead, it can result from
increasing returns or economies of scale, that is,
from a tendency of unit costs to be
lower with larger output.
Economies of scale give counties an incentive to
specialize and trade even in the absence of
differences between countries in their resources or
technology.
Economies of scale can be internal (depending on
the size of the firm) or external (depending on the
size of the industry).
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Costs of Environmental
Transportation Standards
International
Trade
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Transportation costs
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Resource-oriented industries
• locate near the source of raw materials used by the
industry.
Market-oriented industries
• produce goods that become heavier or more difficult to
transport during production, so they locate near the
markets for their products.
Footloose industries
• face neither substantial weight gains nor losses during
production, and can locate where availability of other
inputs leads to lower manufacturing costs.
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Environmental standards
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As a resource
endowment or
as a factor of
production A comparative
Lower
advantage in
environmental
polluting goods
standards
and services.
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Environmental standards
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Determinants of international
trade
Differences in relative factor
abundance [factor endowments]
international trade
Determinants of among nations
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Characteristics
[quality] of the
home country
environment
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Demand
Chance
conditions
Factor National
Government
conditions competitiveness
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