Wk8:External Economies of Scale and the International Location of Production

Question 1

Describe constant returns to scale

Answer 1

When inputs to a production process increase at a certain rate, output increases at the same rate. IRS is increasing returns of scale

Question 2

What might cause one country to have an initial price advantage

Answer 2

Countries that start as large producers in certain industries tend to remain large, known as an established advantage. Hence there is no guarantee that the right country will produce a good that is subject to external economies. Moreover, comparative advantage may play a role due to different resources and technology.

The effect on national welfare is mixed as some countries will benefit from no trade and some of the world economies will benefit from concentrating production on external economies. External economies can depend upon two important outputs, current output and cumulative output over time. Dynamic increasing returns to scale exist if average costs fall as a cumulative output rises.

Question 3

Describe dynamic increasing returns

Answer 3

Dynamic increasing returns occur if average costs fall over time as cumulative output over time rises, implying dynamic economies of scale. These returns could arise if the cost of production depends on knowledge, the experience of the production process over time. CAN ALSO BE USED TO JUSTIFY PROTECTIONISM.