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Sem 5 Prep
← Intl TradeEconomies of scale and intra-industry trade

Formulas for this chapter

Average cost per unit

Average cost = total input required / quantity produced

To show economies of scale numerically. Compute it at two output levels; a falling figure is economies of scale, a rising one is diseconomies.

Total input
Labour or cost required at that output, often a fixed part plus a variable part
Quantity
Units produced in the period

Labour saving from concentrating production

Saving = (labour for each country separately, summed) - (labour for one country producing the whole output)

The class's demonstration that identical countries gain from trade. With labour = fixed + quantity, the saving equals the fixed requirement that is eliminated.

Fixed requirement
The part of labour that does not vary with output, 5 in the class table

Intra-industry trade index

T = 1 - |X - M| / (X + M)

To measure how much of a country's trade in an industry is two-way. T = 0 means one-way trade only; T = 1 means exports equal imports. State the level of industry aggregation, because widening it raises T.

X
Value of exports of that industry or commodity group
M
Value of imports of the same group
Step 1 of 28
The ideaTheory

Two identical bakeries

Two towns, identical in every way. Same people, same ovens, same tastes. Each bakery makes ten kinds of bread.

Now let them trade. Each specialises in five kinds, makes twice as much of each, and unit costs fall in both towns. Both are better off.

Nothing in Heckscher-Ohlin can explain that, because the two towns have identical endowments. Something else is going on, and it is the falling cost of doing more of one thing.

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