Increasing returns

Question 1

Why are economies of scale a reason for world trade?

Answer 1

If technology provides increasing returns, it makes sense to specialise and trade, allowing to consume more and cheaper.

Question 2

What are economies of scale?

Answer 2

When production inputs increase, output increases more than proportionally.

Question 3

An increase in the output in the industry can be due to?

Answer 3

1. More firms in the industry

2. More efficiency in particular firm

Question 4

What are external EOS?

Answer 4

Decrease in average costs as the number of firms in the industry decreases.

Question 5

What are internal EOS?

Answer 5

Decrease in average costs when the output of an individual firm increases.

Question 6

What are market specs in external EOS industries?

Answer 6

Many small firms and perfect competition

Question 7

What market structure do internal EOS lead to?

Answer 7

Monopolistic competition.

Question 8

What are the reasons for external EOS?

Answer 8

1. Knowledge spillover
2. Labor market pooling
3. SPecialised suppliers

Question 9

What are the assumptions of external EOS markets?

Answer 9

1. External increasing returns

2. Perfect competition

Question 10

What happens to world price after economies engage in free trade in industries with external EOC?

Answer 10

The world price drops below all market prices in the world, since only the country with the lowest AC will be left and it will operate at the lower point of its AC curve.

Question 11

What effects in a world economy does external EOS entail?

Answer 11

Locks in one producer of large volume and is not optimal. Even if another firm has a lower AC, it cannot attain enough demand to compete with the incumbent firm.

Question 12

How do external EOS affect countries welfare?

Answer 12

It can affect it negatively if the increasing returns dominate comparative advantage, like in the case of watch producers. You could get cheaper watches from someone else, but since one firm dominates the market, it is impossible for others to achieve so much demand that they would reach such low costs.

Question 13

What is intra-industry trade?

Answer 13

A type of trade that occurs when different countries trade the same type of differentiated good.

Question 14

What are monopolistic competition markets?

Answer 14

It is the inbetween monopoly and perfect competition markets. Many firms, but they are price setters. Firms are not large enough to affect the overall market price, so their decisions are not interrelated.

Question 15

What are the assumptions of monopolistic competition model?

Answer 15

1.Firms produce the same good, have same technology and same demand.

Question 16

What are the effects of trade on monopolistic markets?

Answer 16

It expands them so firms face greater demand. then they can specilaise more and consumers can enjoy greater varity of goods at a lower price.

Question 17

How does increased market size affect the CC and PP curves?

Answer 17

It decreases the CC curve and does not affect the PP curve.

Question 18

What happens when a big firm with low costs enters a new market?

Answer 18

Smaller firms shrink or dissapear and prices go down.

Question 19

What effects does trade have on monopolistic competition with productivity differences?

Answer 19

It expands the market, but it penalizes high cost firms. It lowers the c* and increases demand for each price level.

Question 20

What is foreign direct investment?

Answer 20

When a firm owns more than 10% of a foreign firm or owns production facilities abroad.

Question 21

What is vertical FDI?

Answer 21

Firms either become suppliers or buyers of their own products, driven y competitive advantage and involves flows from developed to developing countries, because it is cheaper to do so.

Question 22

What is horizontal FDI?

Answer 22

Its investment driven by customer location, between developed countries.

Question 23

What is dumping?

Answer 23

Dumpinc occurs when a price of good abroad (net of transport costs) is below its domestic price.

Question 24

How do countries regulate dumping?

Answer 24

They implement duty that is the same amount as transportation costs.