economic

Question 1

winners and loosers of global tradein open economies. Short and long runf.

Accepted Answer

Long run: owners of a country‘s abundant factors gain from trade, while owners of a country‘s scarce factors lose# In the short run both lose in the industry that has to reduce production due to specialization and trade (E.g. as in the capital-abundant home country the production of textiles is reduced, capital owners will suffer from their firms’ losses; textile workers will become unemployed and suffer from lower income) E.g. as in the capital-abundant home country the production of textiles is reduced, capital owners will suffer from their firms’ losses; textile workers will become unemployed and suffer from lower income.

Question 2

Can we avoid the negative consequences for low-skilled workers in Germany by abolishing international trade? What might be an optimal strategy to minimize disadvantages of global trade in Germany

Accepted Answer

if country closes border, produce all itself, more expensive and opportunity cosy rises, total income would decrease international trade can be fair, if a precautionary strategy reduces individual losses & really compensates remaining losers.

Question 3

Is the rising income inequality in industrialized countries a consequence of free trade?

Accepted Answer

•The majority of economists argue that free trade has indeed contributed to a certain degree to the increasing wage inequality, but that the main causes lie elsewhere.•Most economists find that instead of trade, technology is far more important to explain the rise of wage inequalities as technical progress devalues less-skilled work. •Advanced economies can react to these challenges in dynamic international competition using defensive or offensive strategies:Defensive: Imposing restrictions on competing imports. Precautionary: Shifting resources to more sophisticated industries. Educating the less-skilled = turning losers into winners •From an economic point of view the precautionary strategy would clearly be the superior and even necessary strategy. But: such a policy may be politically hard to enforce. Fairness?•International trade can be fair, if a precautionary strategy reduces individual losses & really compensates remaining losers.

Question 4

What is the Leontief paradox? how can we explain it?

Accepted Answer

Based on the traditional HO model one would expect that the U.S. would be an exporter of capital-intensive goods and an importer of labor-intensive goods. However, this was not the case in the 25 years after World War II Countries that are abundant of unskilled labor, have a comparativeadvantage in the production of goods using unskilled labor in arelatively intense manner. If the industry had time to mature andproduces with mass production techniques, capital-intensity of production at the same time may be rather large. HO model useful in explaining trade between industrialized and developing countries (nort-south trade) But cannot explain occurence and expansion of intra-industry trade, (trade similar proudcts dirffrenetiated by futures) Nortz north trade --> Heteroegenitiy of labor: Neo-factor proportions theory: 3 factors od production: capital, skilled labor and unskilled labor capital abundant c: rich of skilled workers, comparative advantage in producing high skill productshighly skilled workers are winners of trade in industrialized countries, while low skilled workers lose

Question 5

Static vs dynamic gains from trade

Accepted Answer

•Static gains from trade“ due to comparative advantages producing additional ressources may further increase a country‘s growth rate and result in „dynamic gains from trade“.•Higher income due to static gains from trade may increase savings, investment and growth.•Higher investment is accentuated if investment goods are imported or made our of imported materials. This is most important in developing countries where capital equipment cannot be produced due to technical or other reasons.•Higher competitive world market pressure further contributes to product improvement, innovation and growth.•The extension of a domestic to a global market may produce several „economies of scale“.

Question 6

What are cononmies of scale and what kinf o eos are relevant for the emergence and structure of international trade?

Accepted Answer

•Economies of scale: if all inputs are increased by a given percentage, output rises by a greater percentage. It implies that production cost per unit of output declines as the scale of operation expands.Internal economies of scale occur when the cost per unit of output depends on and decrease with the size of a firm (typical for firms in industrys with monopolistic competition, if number of firms increases--> leads to higher average cost as each firm can sell less)•Because global trade increases market size, trade is predicted to decrease average cost in an industry characterized by monopolistic competition.•Because average costs decrease, consumers can also benefit from a decreased price and an increase in consumer welfareAs a result of trade, the number of firms in a new international industry is predicted to increase relative to each national market External economies of scale occur when cost per unit of output depends on and decreases with the size of the industry (

Question 7

What are main causes of e.o.s. external to the firm? In principal, these might cause ambiguous welfare effects with increasing international trade. Why?

Accepted Answer

Because global trade increases market siye, trade is predicted to decrease average cost in an industry characterized by monopolistic competitionbecause average cost decreases, consumer can benefit from a decreases price and increase consumer welfare. As a result of trade, number of firms in a new international industry is predicted to increase relative to each national marketmore produce due to specialization, labor pooling may attract pool of workers reducing employes search and hiring costs of each firm, existence of knowledge pullover

Question 8

Which consequences do internal e.o.s. have for international trade? Which differences occur if trade is caused by internal e.o.s instead of comparative advantages in specific countries.

Accepted Answer

1) occur whe the cost per unit of output depends on and decrease with the size of a firm(typical for firms in idustries with monopolistic competition à if number of firm increases, lead to higher average cost as each firm can sell less (lower prices due ti compeitition) à global trade increases market size, trade is predicted to decrease average cost I monolisitic compà consumer benefit from decreasing prices and increases in consumer welfar) Trade offers an opportunity for mutual gains from trade even if countries do not differ in their resources or technology. Ricardians model occurs only between industries: interindustry trade Economies of scale: all winners, no systematic distributional tradeby comparative advantage one winner and one looser

Question 9

Some countries have tried to avoid negative effects due to e.o.s. by an import substitution strategy based on an “infant industry argument”. Discuss the pros and cons of this strategy.

Accepted Answer

By production of infant industry:pr: productivity up, AC down, competitiveness up, P decrease Con: in the beginning domestic AC and prices are higher in the short run Long run: specialists may be missing à working in old cluster Small domestic markets may limit eos in domestic economy, AC may not drop enough, protectionism destroys compettionand incentives to increase productivivty , government may fail to find the right industry which is hard to predict, if one government can know this and will subsidize à global subsidiese (zuschuesse) à global price falls, à future technologie are created but not profitable markets

Question 10

Economies of scale external to the firm

Accepted Answer

•Economies of scale external to the firm mean that the productivity of the firms within an industry depends on how large the industry (not the size of the firm) is. External e.o.s. may – in contrast to internal e.o.s. – still be consistent with perfectly competitive individual firms.•External economies of scale may result if a larger industry, organized in industrial clusters, allows for more efficient provision of services/equipment to firms in the industry. Specialized suppliers: Specialized equipment or services may be needed for the industry, but are only supplied by other firms if the industry is large and concentrated Labor pooling: a large and concentrated industry may attract a pool of workers, reducing employee search and hiring costs for each firm. Existence of knowledge spillovers: workers from different firms may more easily share ideas that benefit each firm when a large and concentrated industry exists. Dynamic increasing returns: External eos arising from acuumulation of knowledge are driven by learining curvers= dynamic increasing retruns Countries that had an early head and already realized substantial learning effects may prevent other c.p. (with comparable learning effects) more efficient countries from entering the market.It is debated whether scale economies like external economies at a point in time potentially justify protectionism following an „infant industry argument“

Question 11

Explain verbally and illustrate with a figure why international trade with e.o.s. can produce globally inefficient results.

Accepted Answer

Thailand imports watches from Switzerland (supply world market) at P1. Low enough to blocl entry by thai producers who must produce watches at cost C0. If Thailand were to block all trade in watches, it would be able to supply its domestic market are lower price, p2 Average cost cruve of Thailang below Swiss. Swiss industry existed before Thais, and is able to sell price at P1 which is bwlos C0 (cost of production of thai if it began production on its own). A pattern of stabiliyation established by historical accident may persist even when new producers could potentially have lower costs. When there are external econonmies of scale, trade can potentally leave a c worse off than it would be withhour trade. EG Thailand imports watches from switzerland which is able to supply at world market at price p1 (low enough to block entry by thai producers who must initially produce watches at cost CO (higher than P1). Yet if thailand were to black all trade in watches it would be able to supplz a t its domestuc market Dthat ate lower price P2 Thailand imports watches from Switzerland (supply world market) at P1. Low enough to blocl entry by thai producers who must produce watches at cost C0. If Thailand were to block all trade in watches, it would be able to supply its domestic market are lower price, p2 Trade based on external economies of scale may under certain circumstances have an ambiguous effect on national welfare. If external economies of scale existà pattern pf trade may be due to historical accidentrs. C starts out as large producers in certain industries tend to remain large producers evem if some other country could potentially produce the goods more cheaply

Question 12

US-EU trade war

Accepted Answer

In August 2018, Jean-Claude Juncker, head of the EU Commission, achieved a consensus with Donald Trump that the US would refrain from plans to introduce tariffs on EU automobiles while the EU announced to, inter alia, import an unspecified higher quantity of soy beans from the US. Meanwhile, driven by market reactions, the EU has bought more US soy beans. The US suffers from selling less soy beans to China due to Chinese retaliation tariffs, so that the US had to reduce their soy bean prices to respond to the drop in China’s world market demand. Hence, today EU corporations simply buy more soy beans due to lower US soy bean prices (and not due to the non-binding voluntary US-EU deal). Economic impacts of Obama’s tariffs on Chinese car tires Barack Obama 2009: 35 % US tariff on Chinese car tires US-Imports drop from 11 to 5 mio tires; 1,200 new US jobs (+ 2%) China retaliates on US chicken China imports 90 % less chicken. US exporters loose US-$ 1 billion Threefold increase of tire imports from other countries to the US, despite higher export prices: gain of other foreign exporters: US-$ 1.1. billion US consumers lower purchasing power: loss of 3,700 retail jobs = Net US-job loss: 2,500 (3,700 – 1,200) US-jobs in the US due to tariffs + loss of revenues and jobs in the US chicken industry. Total costs per job saved in the tire industry: US-$ 900,000 Annual income of a worker in the US-tire industry: US-$ 45,000 These trade restrictions and costs related only to two products. Donald Trump‘s lists of potential tariffs includes thousands of products!

Question 13

Why do we have to distinguish small and large countries to assess international trade instruments? Is Germany a small and Europe a large country?

Accepted Answer

Because small countries can not influence prices on the markets where as large countries with large open economies import or export changes can affect world market prices due to the share and influence of the countries trade on the world product markets Instruments that affect import or export prices like tariffs, export subsidies or credit subsidies. Only large economies can affect these instruments???Germany is a small country, because it does noy establish own int policies, europeam depend on export or imports depends on the product

Question 14

Assume that foreign producers become more productive and cheaper so that world market price decreases. Explain the different impacts that the reduction of the world market price will have for a small importing country that has introduced

Accepted Answer

a. a tariff: Domestic price decreases, Government revenue falls, consumer surplus increases, national welfare falls b. a quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by domestic producers and from imports. No change in government revenue, license holders earn more, c. a voluntary export restraint producer surplus increases, consumer surplus decreases, national welfare falls, rent goes to foreigner

Question 15

Explain how the WTO addresses tariffs and non-tariff barriers and the reasons why these differentiated rules have been established.

Accepted Answer

WTO addresses trading agreements in three ways…..Because it leads to free trade. Rules= system to prevent world economy to go back, world trade negotitationà push toward free trade Preferential trading agreements are trade agreements between countries in which they lower tariffs for each other but not for the rest of the world.Under the WTO, such discriminatory trade policies are generally not allowed:Each country in the WTO promises that all countries will pay tariffs no higher than the nation that pays the lowest: called the “most favored nation” (MFN) principle.An exception to this principle is allowed only if the lowest tariff rate is set at zero.

Question 16

Which kind of agreements does the WTO cover

Accepted Answer

1) General Agreement on Tariffs and Trade (GATT): covers trade in goods General Agreement on Tariffs and Services (GATS): covers trade in services (e.g., insurance, consulting, legal services, banking). Agreement on Trade-Related Aspects of Intellectual Property (TRIPS): covers international property rights (e.g., patents and copyrights).

Question 17

Explain the WTO’s “Most Favored Nation Principle”. What is the reason to adopt such a principle?

Accepted Answer

•The Most Favored Nation-Principle (MFN) shall guarantee that trade advantages which are granted to a particular GATT-WTO member are always granted to all GATT-WTO members.•Exception: Though the GATT-WTO in general outlaws "preferential (regional) trading agreements", it makes an exception if they lead to free trade. Therefore, regional free trade areas (as the former NAFTA, now “United States Mexico Canada Agreement USMCA”) between Canada, Mexico and the U.S.) or customs unions (as in the case of the E.U.) can be allowed. For a discussion about their welfare effects see section 6.10.

Question 18

How do free trade areas and customs unions differ?

Accepted Answer

1. Free trade area: an agreement that allows free trade among members, but each member can have its own trade policy towards non-member countriesExample: North America Free Trade Agreement (NAFTA). 2. Customs union: an agreement that allows free trade among members and requires a common external trade policy towards non-member countriesExample: European Union.

Question 19

Which economic advantages can a successful WTO agreement provide in comparison to a similar preferential trading agreement? Why have preferential trading agreements spread relatively fast in the last years?

Accepted Answer

General Agreement on Tariffs and Trade (GATT): covers trade in goods General Agreement on Tariffs and Services (GATS): covers trade in services (e.g., insurance, consulting, legal services, banking). Agreement on Trade-Related Aspects of Intellectual Property (TRIPS): covers international property rights (e.g., patents and copyrights). Preferential trading agreements increase national welfare when new trade is created, but not when existing trade from the outside world is diverted to trade with member countries.1. Trade creation and trade diversion

Question 20

what happens if G up with fixed er in a recession from a short run Keynesian perspective?

Accepted Answer

Goods market: G up, Macroeconomic demand up, employment, income and production up, dmenad for liquidity (money) up with constant MS up--> increase of interest rate because i upIn domestic goods market: domestuc i up--> macroeconomic demand down-> employment down-> dampening strong Y up--> cpital imports up supply foreign exchange upcapital expo down, demand for fe down Value of foreign currency down --> not possible with nfixed ER--> domestuc CB intervenes demands foreign currency-> Money up, i down until equilibrium is reached a the foreign level of i

Question 21

Short run Keynesian perspective in a recession> fiscal policy increases G

Accepted Answer

more effective with Fixed ER rather than with flexible, because Flexivle ER: G up, shifts income to a higher level, but is restricted by higher final interest rate--> crowidng out of investment Fixed Er: G ups, leads to same effects with flexible er, but additinally requires interventions when value of currency changes, thereby require to buy foreign currency---> M up-> i down-> Investment up-> Y ups -> Y2 Final Y2 is lower with flexible er and higher with fer because interventions-> M up, i down, Y up partial crowding out of I is completly avoided

Question 22

Discussion thesis 1:Free Trade is beneficial only if your country is strong enough to stand up to foreign competition Thesis 2: Foreign competition is unfair and hurts other countries when it is based on low wages (“pauper labor argument”) Thesis 3: Free trade exploits less productive countries and makes it worse off if its workers receive much lower wages than workers in other nations

Accepted Answer

thesis 1: wrong, for international trade to be beneficial absolute strengthen or advantage (productivity) is irrelevant Its weak= less productive countries will gain from trade if they specialiye on their comparative (opportunity cost) advantages and achieve a world maarket price in the relevant price range thesis 2: wrong, workers in high- wage c are not suffering from specialiyation due to low wages in other countries. Rather specialisation helps to work and specialiye in industries with comp adv and high wages and avoid industries with com disadvantages and low wages.also in a competition with low wage c, high wae c gain from trade by specialisation on com adv--< production and consumption up Thesis 3: wrong, because by specialising on thei comp advantage low-ware foreign country focuses on sugar roduction ->> wage /hour =5 eur. if they would not trade, they would have to also produce cars in their country. Car production would have lower wages than sugar production (eg 2,50 eur) --> so that average wage could converge below 5 Euro/hour

Question 23

Long run effects of low skilled foreign immigrants. Assumption, and Model after migration

Accepted Answer

Assumption: 2 countries, higher wages in domestic c, perfect competition, capital can move betw industries in one country but not betw countries, perfect mobile labor Model: a b c d f g e a) welfare increase of capital income, wages drop cap income increasesb) capital owners welfare increase die to more production of syrian workers (additional profit)c) more production additional income which syrian workers in domestic c getd) Syrian workers income who migratede) what syrian workers earn in syria and what they get now germany wins b, syria cvalue of production changes : B,c,d,e

Question 24

Impacts of migration on the c with immigration

Accepted Answer

Positive output effect: total output increases, (b,c,d,e) capital income in dom c increases by a+b = capital owners are winners of immigrationAggregate wages of domestic workers decrease by a: domestic workers / employees are losers of immigration (for given capital)- Wages of immigrants correspond to area c+d+e. As their wages increase by c+d migrants also benefit from migrationI- mpact on total wages in home country is unclear (‐a vs. +c+d+e), also due to the fact that immigrants can transfer part of their incomes (c+d+e) at home (“ remittances”).- Income of domestic production factors (without immigrants) increases by b. This implies a net welfare gain for the domestic economy (benefitting domestic capital owners).

Question 25

impacts on the country with migration

Accepted Answer

- Negative output effect: value of total output decreases by d+e. But: given the existence of diminishing marginal productivity of labor output will decrease at a slower rate than labor, leading to an increase in per capita output.- Capital income in the country with out‐migration decreases by d+f+g: capital owners are losers of emigration- Wages of workers who stay in the country with out‐migration increase by f+g: non‐emigrating workers are winners- Wages of workers who emigrate increase by c+d - Total income of foreign production factors (including the emigrants) increases by c: welfare gain

Question 26

impacts on world production of migration

Accepted Answer

Wolrd production/incone/gdp increases by b+c è In a capital abundant country (relatively high wages): Trade: the country will import goods and services produced with cheap labor in foreign countriesMigration: The country will experience immigration leading to production at lower wages within the country. è In both cases winners in the capital-abundant country are the capital owners (…and the skilled workers/employees…), losers are the low-skilled workers/employees. è Thus: for tradable goods and services the import of goods and services (trade) and the migration of the mobile part of the workers are substitutes, the economic effects are corresponding.

Question 27

Rybczynski Theorem I

Accepted Answer

Heckscher-Ohlin model with two goods and two factors, an increase in the amount of an abundant factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry.The Rybczynski theorem can also be proven for immigration, when labor in the economy grows, and owners of capital as the abundant factor win, but wages of relatively scarce labor decrease. This can be proven for imigration in the end of this process, capital owners will win. Wages may increase. Royinski who

Question 28

Rybczynski Theorem II Which effect will the imperfection of labor markets have on wages?

Accepted Answer

Example – immigration of low-skill labor to Europe: focusing on capital and labor intensive industries in capital abundant EU countries, e.g. computer versus shoe industry (Feenstra/Taylor 2017: 140-142).In the long run, labor and capital are able to move between industries: instead of allocating the extra labor supply to both industries, all the labor inflow may be allocated to the labor-intensive shoe industry. To produce with the increased labor supply (which may reduce wages) some more capital is needed and shifted to the shoe industry along with some high-skill labor (e.g. managers).Hence, in the long run, the capital-labor relation remains unchanged in each industry and the additional labor is fully employed Factor prices (e.g. wages) do not need to change when the economy can absorb the extra amount of a factor by increasing the output of the industry using that factor intensively and reducing the output of the other industry.This finding is also called the factor price insensitivity result.The long-run model assumes full-employment. If, however, unemployment exists in the country with out-migration, the welfare profits may be much higher, because it does not lead to a (strong) reduction of output in this country.The model assumes that capital is mobile between industries in a country, but given and immobile between countries. However, in the long-run immigration might lead both to higher investment and to capital imports compensating for the downward pressure on wages and even further stimulating output growth. The long-run effects of immigration therefore can be expected to be even substantially more positive for the in-migration country He says the abundant factor winiing, all people will go to abundant factor is not true. But when we have immigration on one hand there will be an labor inflow. Also some capital from computer industry will go to other industry. Some capital moving to show industry and high skill also moving. 2. He has analyst that process of adaptation a little bit more, The reason is that an influx of workers with different skills encourages people to specialize in jobs that they are uniquely suited for, which helps businesses and the economy to grow. Low skilled foreign workers and low skilled domestic workers ofte complenet each other.

Question 29

Inhomogenous labor and wages

Accepted Answer

Immigration and Wages in the United States This table shows the estimated effect of immigration on the wages of workers, depending on their educational level. Short-run estimates hold capital and land fixed, while long-run estimates allow capital to adjust so that the capital/labor ratio and real rental are constant in the economy. Immigration has the greatest impact on workers with very low or high levels of education and only a small impact on those workers with middle levels of education (12 to 15 years). The impact is even smaller in the long run. Immigration has the greatest impact on workers with very low or high levels of education and only a small impact on those workers with middle levels of education (12–15 years). The impact is even smaller in the long run, when capital adjusts to keep the real return to capital fixed in each industry. "US born see always a caneg in wage. Migrants see always a decrease because there are a lot of low skilled, and more low skilled drop wages, but first of all, low skilled workers who work as foreign workers work in different jobs than low skilled domestic workers. If employers make a difference betw foreign and domestic, those who migrate will compete with other foreign born workers.

Question 30

Immigration in the short run

Accepted Answer

welfare effects may vary with the qualification of migrants different characteristics beyond years of schooling may create relevant inhomogeneity, so that immigrants are no perfect substitutes of domestic workers: e.g. diverging (il)literacy, domestic language knowledge, human capital, age , business cycle (recession or boom) and others may cause results which will also differ from the long run model with homogeneous labor. To overcome this inhomogeneity. employment requires additional language courses, education, training, labor market interventions to provide them with acces to the labor market. In the short run this interventions may cause social cost of immigration through larger expenditures for human safety programs To finance social costs, governementsoften have to impose new/higher taxes --> might reduce net gain of capital owners/high skilled workers The size of costs diminishes the earlier sufficient integration is provided. May result in fiscal surplusin medium/long run

Question 31

Potential macroeconomic impacts of 2015 refugee immigration to Germany

Accepted Answer

High integration costs in the short run = high fiscal deficits, but also additional macroeconomic demand effectsOver time, incomes increase by additional macroeconomic demand and related multipliers but also by capital income increases.In the first years, fiscal deficits > income gains, later – the more refugees will be integrated into the regular labor market, income gains > deficits and yield a total income gain for immigrants and non‐immigrants in Germany. Non‐immigrants are assumed to finance all integration costs; nevertheless, their net income after taxes and social security contributions also increases. Capital owners will gain the most but also others.The more you improve language courses the more you can increase economic and social policy

Question 32

selected challenges for germany, in bezug auf immigration

Accepted Answer

Selected challenges for Germany: - Minimum wages: same for refugees? Lower? Adoption of special long-term unemployment exemptions also for refugees? - Xenophobia hatred of foreigners in Germany and unwillingness to foster intensive integration, due to e.gUnreasonable economic concerns, distributional and fairness concerns, perceived ufair treatment and subjective “sanctioning

Question 33

potential economic impact of refugee immigration rto germany

Accepted Answer

Integration of immigrants is a two way process, the success of which depends on botth. In particular the chart from 2005 and 2010 shows, the bitterness in lilfe is strongly associated with immigration. it can not just be explaines with competing with onesuelf in the labor market. instead it appears that people who feel that they have not got what they derserve in life oppose immigration for spiteful reason

Question 34

The euro area: pre-requisites for accession of new members

Accepted Answer

The maastricht treaty established 5 rules dor admission to the eurozone: convergence criteria 1-3 nominal measures: •Under a peg, the exchange rate must be fixed or not vary beyond tight limits •Purchasing power parity (PPP) then implies that the two countries’ inflation rates must be very close no more than 1,5% points above level in 3 members states with lowest inflation rate last year•Uncovered interest parity (UIP) then implies that the two countries’ long-term nominal interest rates must be very close. no more than 2 % above level in 3 member states with lowes inflation last yeaar fiscal criteria> Government deficit no more then 3% of GDP in last financial yearGovernment debt < 60% of GDP last year --> nominal measures ensured that eurozone began with low inflation rate. fiscal discipline: a c with high nominal debt willl lobby for high inflation one in union --> Stability and growth pactThe convergence criteria were supposed to ensure that €-area member countries would have to enter and continue with similar monetary and fiscal policies. Policy harmonization should also be identified by the exchange rate criterion (stable exchange rate without devaluation Fullfillment should provide political evidence about similarity of counries. EU hoped to reap benefits from currency union: •Foreign trade and investment between member countries rises•Less Stability costs of a common currency with rising symmetry•If a home country and its potential currency union partners are more economically similar or “symmetric” (they face more symmetric shocks and fewer asymmetric shocks), then it is less costly for the home country to join the currency union.

Question 35

Situation without trade

Accepted Answer

germany China (foreign c) Supply of capital relatively high rel scarce/lowPrice of ca low highPrice of cap intensive cars low high Supplz of low skill labor relatively low rel highprice of low skill labor high lowpric of l s l intensive textiles high low

Question 36

Economies of scale internal

Accepted Answer

economies of scale which has been assumed away by the Ricardo model and the HO model is a plausible means to explain the occurrence of intra-industry trade occur when the cost per unit of output depends on and decrease with the size of a firm •If the number of firms in a given market and in monopolistic competition increases, •this leads to higher average cost as each firm can sell less•this leads to lower prices due to competition •Because global trade increases market size, trade is predicted to decrease average cost in an industry characterized by monopolistic competition.•Because average costs decrease, consumers can also benefit from a decreased price and an increase in consumer welfare•As a result of trade, the number of firms in a new international industry is predicted to increase relative to each national market. •Because global trade increases market size, trade is predicted to decrease average cost in an industry characterized by monopolistic competition.•Because average costs decrease, consumers can also benefit from a decreased price and an increase in consumer welfare•As a result of trade, the number of firms in a new international industry is predicted to increase relative to each national market.

Question 37

Economies of scale external

Accepted Answer

scale external to the firm mean that the productivity of the firms within an industry depends on how large the industry Specialized suppliers:Specialized equipment or services may be needed for the industry, but are only supplied by other firms if the industry is large and concentratedEg silicon valley: new firms to semiconduct products--> freeing individuall producers from the expense of developing capital equipemnt internally and by spreading cost of development. Labor pooling: a large and concentrated industry may attract a pool of workers, reducing employee search and hiring costs for each firmeg: silicon valley: quit job and have next day same in another firm Existence of knowledge spillovers: workers from different firms may more easily share ideas that benefit each firm when a large and concentrated industry exists.Eg: sharing ideas more easiliy and benefits for all when drinking beer Dynamic increasing returnCountroes that had an early head and realized learning effects may prevent oyher more efficient countries fromentering the market

International Economics (Fach) / economic (Lektion)