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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 3 of 28
The real wordsTheory

Increasing returns to scale

Increasing returns to scaleA production situation in which output grows proportionately more than the increase in inputs. Doubling inputs more than doubles output.

The deck's striking consequence, which is the exam sentence:

With increasing returns to scale, mutually beneficial trade can occur even if nations are identical in every way.

Your note names the causes: specialisation, the division of labour, and better use of machinery.

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