External Economies of Scale

Question 1

Explain briefly what is the intuition as to why economies of scale can lead to benefits from international trade.

Answer 1

Given two countries and increasing marginal returns, the combination of the production from both countries leads to an increase in total production because doubling inputs leads to more of a doubling of output.

Question 2

Give the three main reasons why cluster firms may be more efficient than sparsed ones.

Answer 2

1. Specialized Supplier:
   It can be difficult for one specialized firm to live of its contracts with only one client, while clusters provide easy acces to other clients even if the product is highly specialized. It can also be easier to outsource a part of production.
2. Labor Market Pooling:
   See unemployment and labor shortages
3. Knowledge spillover:
   It may be easier for a banker in New York to get up to date on the most recent financial analysis techniques when he has contacts in other firms near him.