In the monopolistic competition model of trade its

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In the monopolistic competition model of trade, its presumed that the economies of scale that give rise to international trade occur at any level of the individual firm That is, the larger any firm’s output of a product, the lower its AC Not all scale economies apply at the level of the individual firm; concentrating production of an industry in one or few locations reduces the industry’s costs, even if the individual firms in the industry remain small When economies of scale apply at the level of the industry rather than at the level of the individual firm, they are called external economies Examples of firms that have powerful external economies of scale = semiconductor industry (concentrated in Silicon Valley), investment banking (in New York), entertainment industry (Hollywood) Three reasons why cluster of firms may be more efficient than an individual firm in isolation: (1) ability of cluster to support specialized suppliers (2) the way that a geographically concentrated industry allows labour market pooling (3) geographically concentrated area helps foster knowledge spillovers Specialized Suppliers In many industries the production of G/S requires the use of specialized equipment or support services, but an individual company does not have a large enough market for these services to keep the suppliers in business By bringing together many firms that collectively provide a large enough market to support a wide range of specialized suppliers Availability of dense network of specialized suppliers have advantages over firms elsewhere since key inputs are cheaper and more easily available b/c there are many firms competing to provide them This allows firms to concentrate on what they do best and contract other aspects of their business A company that tries to enter the industry in another location would be at an immediate disadvantage b/w it would lack easy access to the cluster industry’s suppliers and would gave to provide them for itself or be faced with the task of dealing with the suppliers at long distance Labour Market Pooling A second source of external economies is the way that a cluster of firms can create a pooled market for workers with highly specialized skills Pool markets are an advantage to both producers and workers: producers – less likely to suffer from labour shortages Workers – less likely to become unemployed Knowledge Spillovers an important source of technical knowhow is the informal exchange of info and ideas that take place at a personal level informal diffusion of knowledge often seems to take place most effectively when an industry is concentrated in a fairly small area, so that employees of different companies mix socially and talk freely about technical issues
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External Economies and International Trade External Economies and the Pattern of Trade
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