Leipzig University Faculty of Economics and

Transcript:Leipzig University Faculty of Economics and:
Leipzig University Faculty of Economics and Business Administration Institute for Economic Policy International Economics Kristoffer J. M. Hansen III. Growth and the Political Economy of Free Trade III. Growth and the Political Economy of Free Trade International Trade and Economic Growth Additional Causes of International Trade Implications of the H-O Model International Trade and Growth International Trade and Capital Accumulation The Political Economy of Free Trade Winners and Losers from International Trade The Case for Free Trade Income Distribution and Trade Policy Summary References Pugel, International Economics, pp. 67-137 1. Additional Causes of International Trade There are some aspects of trade that are not readily explained by the theory of comparative advantage. Why, for instance, do countries trade the same kinds of goods between each other (intra-industry trade)? This seems intuitively to contradict what we have learned about comparative advantage. Here we will focus on two aspects: Economies of scale and product differentiation. This will give us a more complete understanding of the flows of trade. Economies of Scale With constant return to scale, input use and total cost rise in the same proportion as output. Average cost is constant: cost divided by number of units produced is constant. With scale economies, output quantity goes up by a larger proportion than does total cost – average cost per unit of output is decreasing. Note that eventually, we will always face increasing marginal costs. Constant average costs imply that a) all factors are perfectly divisible and b) the prices of factors do not increase as demand for them increases – both implications demonstrably false! Economies of Scale The real determinant of economies of scale is the indivisibility of factors of production or of the product. If one factor is indivisible, it may be underemployed in a given combination with other factors. If we increase input of other factors, we will then see increasing returns or decreasing average costs as output increases until the indivisible factor is fully utilized, and vice versa. All factors of production are indivisible to some extent, but some less than others; e.g., oil or fuel in general seems pretty divisible. There will always be a point beyond which there will be no more economies of scale. Economies of Scale Internal Economies of Scale We can distinguish between internal and external economies of scale. Internal economies of scale are internal to each firm. They are directly related to