Chapter 7 External Economies
of Scale and the International
Location of Production
Dr Wajiha Manzoor
,Previe
w
• Types of economies of scale / Economies of
Scale and Market Structure
• External economies of scale and trade
,Introducti
on
• When defining comparative advantage, the Ricardian
and Heckscher-Ohlin models assume that
production processes have constant returns to
scale:
When factors of production change at a certain rate,
output increases at the same rate.
For example, if all factors of production are doubled then
output will also double.
• In practice, many industries are characterized by
economies of scale or increasing returns:
Production is more efficient the larger the scale at which
it takes place.
Where there are economies of scale, doubling the inputs
to an industry will more than double the industry’s
production.
, Table 1: Relationship of
Input to Output for a
Hypothetical Industry
of Scale and the International
Location of Production
Dr Wajiha Manzoor
,Previe
w
• Types of economies of scale / Economies of
Scale and Market Structure
• External economies of scale and trade
,Introducti
on
• When defining comparative advantage, the Ricardian
and Heckscher-Ohlin models assume that
production processes have constant returns to
scale:
When factors of production change at a certain rate,
output increases at the same rate.
For example, if all factors of production are doubled then
output will also double.
• In practice, many industries are characterized by
economies of scale or increasing returns:
Production is more efficient the larger the scale at which
it takes place.
Where there are economies of scale, doubling the inputs
to an industry will more than double the industry’s
production.
, Table 1: Relationship of
Input to Output for a
Hypothetical Industry
