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Commodities produced under increasing returns to scale
Outputs grow proportionately more than the increase in inputs
Average Labor Input
Total Labor Input divided by Output
External Economies of Scale
Cost per unit of output depends on the size of the industry
Internal Economies of Scale
Cost per unit of output depends on the size of the firm
Specialized suppliers
Clustering of firms collectively provide a large enough market to support a wide range of specialized suppliers
Labor Marketing Pooling
Creates a pooled market for workers with highly specialized skills
Knowledge spill-over
Ability to easily share ideas that benefit each firm in a concentrated industry
Learning Curve
Relates unit cost to cumulative output
Dynamic Increasing Returns
Costs fall with cumulative production over time, rather than with the current rate of production
Dynamic Scale economies justify protectionism
Temporary protection of industries enables them to gain experience (infant industry argument)
Marginal Cost
Change in cost divided by change in quantity = (C2 - C1) / (Q2 - Q1)
Profit Maximizing Rule
Marginal Revenue equals Marginal Cost (MR = MC)
Inter-industry
Phrase: Either / or; Meaning: Either imports or exports in a given sector of the economy
Intra-industry
Phrase: similar; Meaning: Exchange of similar products belonging to the same industry
Horizontal Intra-Industry
Phrase: Both / and / same; Meaning: Both imports and exports in a given sector of the economy at the same stage of processing
Vertical Intra-Industry
Phrase: Both / and / different; Meaning: Both imports and exports in a given sector of the economy at different stages of processing
Important Features of Intra-Industry Trade
Based on product differentiation and economies of scale, related to the sharp increase in international trade in parts and components of a product
Dumping
Selling a product in the importing country at a price lower than in the exporting country
Reciprocal Dumping
Dumping leading to two-way trade in the same product, increasing the volume of trade in goods that are not quite identical
Foreign Direct Investment (FDI)
Investment in which a firm in one country directly controls or owns a subsidiary in another country
Multinational Corporation
Foreign company investing in at least 10% of the stocks in a subsidiary for direct control of business operations
Brownfield FDI (cross-border mergers and acquisitions)
Domestic firm buying a controlling stake in a foreign firm, occurring in surges
Greenfield FDI
Company building a new production facility abroad, tends to be more stable
Horizontal FDI
Affiliate replicates the production process elsewhere in the world, mainly between developed countries
Vertical FDI
Production chain is broken up and parts of production processes are transferred to the affiliate location, mainly driven by production cost differences between countries
Foreign Outsourcing
Firm contracting with an independent firm to produce in a foreign location, a substitute for vertical FDI
Offshoring
Relocation of parts of the production chain abroad, grouping together foreign outsourcing and vertical FDI
