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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 5 of 28
The real wordsTheory

The class's labour table

Labour required to produce a given quantity, identical in both countries.

Quantity51015202530
Labour101520253035

Read the pattern: each extra 5 units of output needs only 5 more units of labour, on top of a fixed 5. So labour = 5 plus quantity.

That fixed 5 is where the increasing returns come from. Spread over more output, it costs less per unit.

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