Chapter 7: External Scale Effects

What are external economies of scale?

Cost advantages that depend on industry size, not firm size.

How do external scale effects relate to trade?

They can lead to specialization due to historical accidents, not comparative advantage

What are the three sources of external economies?

Specialized suppliers, labor market pooling, and knowledge spillovers.

How do knowledge spillovers occur?

Through R&D and informal information exchange.

Why do external scale effects cause lower prices?

Larger industry output reduces per-unit cost, shifting the supply curve downward.

How do external economies affect the location of industries?

Industries may localize in places with a head-start (e.g. Silicon Valley) due to path dependence.

What is “economic geography”?

The study of how trade patterns influence the spatial distribution of industries

What are dynamic increasing returns?

Cost reductions due to cumulative production over time (learning-by-doing).

What is the learning curve?

Shows decreasing unit costs as cumulative output increases.

What trade policy is justified by dynamic returns?

Temporary protectionism to help infant industries build experience.

How can trade harm welfare with external scale effects?

If a country loses industry due to path dependence, it may import at higher costs long-term.

How do external scale effects differ from comparative advantage in price outcomes?

Both countries benefit from lower prices under external scale effects, unlike CA which redistributes gains.