Economies of Scale and International Trade

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