ECON 4040 Lecture PP Chpt 5 Beyond CA

ECON 4040 Lecture PP Chpt 5 Beyond CA - Beyond Comparative...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Beyond Comparative Advantage Chapter 5: More
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1. Trade models built exclusively on the idea of CA have a mixed record of success in predicting trade patterns. 2. It’s very difficult to measure a country’s CA. 3. Even if the CA is known, the country may have several products to choose from which utilize the abundant factor. It’s difficult to predict which one they will produce. Why Comparative Advantage is Not Enough So, a large share of international trade is not based on CA.
Background image of page 2
Internal Economies of Scale
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Both of the previous models assumed constant returns to scale: When inputs doubled, outputs also doubled. In practice, many industries are characterized by economies of scale: Production is more efficient the larger the scale at which it takes place. Doubling inputs more than doubles output. Decreasing costs over a relatively large range Internal Economies of Scale
Background image of page 4
Definitions
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Total Labor Input Output Average Labor Input 10 5 2 15 10 1.5 20 15 1.333 25 20 1.25 30 25 1.2 35 30 1.166 Hypothetical Industry with EOS Two Country World No Trade American production: 10 labor: 15 British production: +10 labor: 15 Total world production: 20 labor: 30 One Country Concentration American production: 20 labor: 25 Result: More efficient production (same output at lower cost) Example: EOS and Benefits of Trade
Background image of page 6
To take advantage of an EOS, America concentrates production in industry A. Industry A will need more labor. That labor will have to come from an industry B. Industry B will have to decrease or stop production. Industry A will export some of the added production at a low price. Industry A in Britain will shrink.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
EOS Can Lead to Trade To take advantage of economies of scale, each of the countries must concentrate of producing only a limited number of goods. International trade makes it possible for each country to produce a restricted range of goods and to take advantage of economies of scale without sacrificing
Background image of page 8
Economies of scale typically lead to a market structure other than that of perfect competition. Internal economies of scale give large firms a cost advantage over small firms and lead to an imperfectly competitive market structure . However…There is a Downside
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
In imperfect competition, firms are aware they can influence the prices of their products: price setters . Can arise from industries with Only a few major producers Many producers but each strongly differentiates its product from rival firms. Types are The Theory of Imperfect Competition
Background image of page 10
Assumptions: Each firm differentiates its products from its rivals. Gives each firm some monopoly power Insulates each firm somewhat from competition Takes rivals’ price as given (they can’t influence it – changing their price doesn’t change their rivals’ price). Real life example:
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 61

ECON 4040 Lecture PP Chpt 5 Beyond CA - Beyond Comparative...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online