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International eco: external eco of scale: left 8 part 4 (Interregional…
International eco: external eco of scale: left 8 part 4
Button Swiss-Thai
External economies of scale, speed up this process:
The more firms move to Thailand, the larger the “gap” between Thai and Swiss prices, attracting even more firms
Examples: Laptop producers moved quickly from Taiwan to China (now they are moving from Shanghai to inland China)
Textile producers are starting to move from Asia to Africa
Watch production moves completely to Thailand
Dynamic increasing returns to scale
But, some economies to scale arise by over time accumulating the experience or the knowledge required to produce more efficiently:
If production costs fall with
cumulative industry output over time: dynamic external increasing returns to scale
Their analysis is similar to that of static increasing returns to scale---> graphical representation of dynamic increasing returns to scale:
Learning curve
So far, we have considered
static
increasing returns to scale:
production costs depend on the industry’s current level of output
Can result in the same effects as the static increasing returns to scale
Rapid changes in the location of production
Some countries worse of under free trade than in autarky
Lock-in of an initial advantage
External scale of economies and trade policy
Theoretically true, but in practice:
Hard to identify which industries to protect, and which ones will never be able to compete
Protection has other (unwanted) effects: may reduce incentives to innovate, produce efficiently
As we saw, under both static and dynamic external scale economies, it may be justified to
protect your own industries from foreign competition
until:
Gained enough experience so that it can compete on world markets
(infant industry argument)
A large enough cluster is present, so that it can compete on world markets
Interregional trade and economic geography
Typically difference in endowments and technology much smaller within countries than between countries (+ almost all factors highly mobile between regions, so that easier to move production between regions):
Increasing returns even more decisive in shaping specialization and trade patterns within a country
To what extent can external economies of scale explain differences in regional economies? Depends on what is tradable and what not !
Share of employment in (different) types of nontradable sectors typically very similar across regions
Most things are non-tradable even within a country (haircuts, doctors, high-school teachers, restaurants, pubs)
(in developed economies, around 60% of consumption is non-tradable)
Typically, tradable goods production very localized within a country
High-tech, life-sciences and medical technology cluster around Eindhoven
Transport services and industry cluster around port of Rotterdam
creative industries, ICT, and business services cluster around Amsterdam
But what determines which region produces what (and thus interregional trade patterns)
Initial advantage causes lock-in !
Historical coincidence often crucial:
Utrecht would probably not be the 4th largest Dutch city, and the Dutch transport hub, if train track from Amsterdam to Arnhem (and on to Germany), 2nd track built in the country, had passed by Amersfoort as initially planned [reason why via Utrecht: easier for the king to get to his hunting grounds around Bunnik]
Geography can also be important:
Port of rotterdam