S CALE E CONOMIES, IMPERFECT COMPETITION AND TRADE

trade/statistics/country/

C ALCULATING IIT

ProductValue of Imports ($ millions) Value of Exports ($ millions) Index of IIT % Golf clubs Vaccines Small cars1, Whiskey Large passenger aircraft 5, , Apples Natural gas27,134.52, Men’s shorts US trade data at: W HAT ARE SOME EXAMPLES ?

2 QUESTIONS 1. H OW IMPORTANT IS IIT IN NON - FOOD MFG FOR DIFFERENT COUNTRIES ?

2 QUESTIONS 2. W HY IS IIT SO PREVALENT FOR INDUSTRIAL COUNTRIES ? 1. IIT is prevalent where trade barriers and transportation costs are low 2. IIT is prevalent in higher income countries: higher income generates taste for variety 3. IIT is driven by (BASIS for ANALYSIS): a. Role of product differentiation b. Role of scale economies Constant economies of scale: long-run average total cost stays the same as the quantity of output changes. total cost  in the same proportion as output  Scale economies (economies of scale) long-run average total cost  as the quantity of output  total cost  as output 

1 ST S OURCE OF S CALE E CONOMIES 1. Internal Scale Economies or internal economies of scale Sources of internal economies of scale Fixed cost of production Increasing returns to scale Results of internal scale economies Modest scale economies: monopolistic competition Large scale economies: oligopoly

2 ND S OURCE OF S CALE E CONOMIES 2. External Scale Economies or external economies of scale Sources of internal economies of scale Emergence of specialized input suppliers Benefits of a common pool of specialized workers Knowledge spillovers

E XPLAINING IIT WITH MODEST INTERNAL SCALE ECONOMIES : M ONOPOLISTIC C OMPETITION Are products differentiated NoYes How may producers? One MonopolyN/A Few Oligopoly Manny Perfect Competition Monopolistic Competition

3 CHARACTERISTIC OF M ONOPOLISTIC C OMPETITION 1. Large number of producers. 2. Product differentiation. 3. Free entry/exit in the long run.