Skip to content
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 4 of 28
The real wordsTheory

The U-shaped cost curve

Economies of scaleThe falling arm of the average cost curve: average cost decreases as output increases.
Diseconomies of scaleThe rising arm: average cost increases as output increases, past the efficient size.

Your note's shorthand: the curve is U-shaped, and the definition of economies of scale is that producing at a larger scale makes average cost fall.

In a diagram question, describe it: output on the horizontal axis, average cost on the vertical, a U with its minimum at the efficient scale.

← BackContinue →