Answer to Question #184291 in Economics of Enterprise for Francina

Question

Briefly discuss the two ways in which economies of scale causes international trade

Answer 1

Economies of scale are a consequence of the increasing returns to mass production when the increase in output outstrips the increase in costs incurred. As a result, as the volume of output increases, the average costs per unit of output decrease, there is a cost-saving, which means that the possibility of forming different prices for different producers (for producers with different production scales).

Theoretically, contrary to the X-O theory, there is a possibility of different prices for the same product in countries with the same proportions endowed with production factors, but with different scales of production, and, consequently, the emergence of international trade between them. Specialization can further increase the scale of production and allow for even larger economies of scale. Thus, international trade, expanding the boundaries of the national market and forming this world market for the sale of a mass product (a product produced on a large scale), can consolidate and multiply this effect. As a result, both large-scale production and large-scale sales are formed to the unconditional benefit of the consumer.