SCALE ECONOMIES, IMPERFECT
COMPETITION AND TRADE
http://www.census.gov/foreigntrade/statistics/country/
INTRA-INDUSTRY TRADE FOR THE UNITED STATES,
SELECTED PRODUCTS, 2012
U.S. Exports
(X)
$million
U.S. Imports
(M)
$millions
Total Trade
(X+M)
$millions
Net Trade
(X-M)
$millions
Intra-Industry
Trade
$millions
IIT
Share
(%)
Perfumes (55310)
1,723
1,962
3,684
(−)239
3,445
93.5
Cosmetics (55320)
3,710
3,058
6,768
(+)651
6,117
90.4
205
308
512
(−)103
410
79.9
Electronic
Microcircuits (77640)
33,483
27,490
60,973
(+)5,993
54,979
90.2
Automobiles(78120)
53,901
149,142
203,042
(−)95,241
107,802
53.1
323
134
456
(+)189
267
58.6
2,414
1,712
4,126
(+)701
3,425
83.0
Clothes washing
machines (77511)
Photographic
cameras(88111)
Books and brochures
(89219)
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3
WHAT ARE SOME EXAMPLES?
Product
Golf clubs
Vaccines
Small cars
Whiskey
Large passenger
aircraft
Apples
Natural gas
Men’s shorts
Value of Imports Value of Exports ($ Index of IIT
($ millions)
millions)
%
305.8
3187.7
98
799.1
605.2
86
1,199.0
800.9
80
757.7
481.7
78
5,988.2
18,821.5
48
102.8
492.7
35
27,134.5
2,802.8
19
701.3
12.1
3
US trade data at: http://www.ita.doc.gov/td/industry/otea/trade-detail/
4 POINTS
1. HOW IMPORTANT IS IIT IN NON-FOOD MANUFACTURED
PRODUCTS FOR DIFFERENT COUNTRIES?
Country
United States
Canada
Japan
Germany
France
United
Kingdom
1989
55.3
54.3
27.8
62.6
71.3
2005
58.3
63.2
41.2
67.5
73.9
2012
63.6
55.4
38
67.2
71.5
69.0
71.7
71.6
4 POINTS
2. WHY IS IIT SO PREVALENT FOR INDUSTRIAL COUNTRIES?
1.
2.
3.
4.
IIT is prevalent where trade barriers and
transportation costs are low
IIT is prevalent in higher income countries: higher
income generates taste for variety
IIT is driven by product differentiation
IIT is driven by scale economies
4 POINTS
3. BASIS FOR TRADE: ROLE OF PRODUCT DIFFERENTIATION
IIT is driven by product differentiation


Consumers view the products of an industry as close, but
not perfect substitutes.
If IIT is based on 2-way trade in varieties of the same basic
product


then growth in IIT over time can be understood from the demand
side.
Income growth →  demand for luxuries

 demand for luxuries →  demand for variety


Note whole story…. If IIT were driven only by demand then we
would see an infinite # of varieties.
There is a limit on the number of varieties that are sold.
4 POINTS
4. BASIS FOR TRADE: ROLE OF SCALE ECONOMIES
IIT is driven by scale economies


Scale economies in some aspects of production encourage
larger production of each variety.
Scale economies limit the number of different varieties
offered into the market.
Recall:

Constant economies of scale:



long-run Average Total Cost (ATC) stays is constant as the
quantity of output 
Total Cost  in the same proportion as output 
Scale economies (economies of scale)


long-run ATC  as the quantity of output 
Total Cost  as quantity of output 
1ST SOURCE OF SCALE ECONOMIES
1.
Internal Scale Economies or Internal Economies of
Scale
As an individual firm expands output, costs per unit
decline.

Sources of Internal Economies of Scale




High fixed cost of production
Increasing returns to scale
Results of internal scale economies on market structure


Modest scale economies: monopolistic competition
Large scale economies: oligopoly
2ND SOURCE OF SCALE ECONOMIES
2. External Scale Economies or external economies of
scale


As all firms in an industry expand output, costs for all
firms in a group fall.
Sources of External Economies of Scale



Emergence of specialized input suppliers
Benefits of a common pool of specialized workers
Knowledge spillovers
EXPLAINING IIT WITH MODEST INTERNAL
SCALE ECONOMIES: MONOPOLISTIC
COMPETITION
Are products differentiated
How may
producers?
No
Yes
One
Monopoly
N/A
Few
Oligopoly
Oligopoly
Many
Perfect
Competition
Monopolistic
Competition
3 CHARACTERISTIC OF
MONOPOLISTIC COMPETITION
1.
2.
3.
Large number of producers.
Product differentiation.
Free entry/exit in the long run → firms earn zero
profits in the long run.