Question

1. In the case of trade based on external economies of scale, the pattern of trade is

determined by relative factor abundance.

determined by comparative advantage.

determined by relative technological differences.

determined by history and accident.

2. Dynamic returns to scale refer to

average cost falls with current rate of production

marginal cost falls with current production

average cost falls with cumulative production over time.

marginal cost fall with cumulative production over time.

3. In which of the following cases would it be possible to have a country LOSE with trade?

Ricardian model, when free trade price equals one of the countries' autarky price.

Heckscher Ohlin model, when scarce factor loses more that abundant factor gains.

With external economies of scale, when a country exhibits lower average costs only because they have been producing the good for more time.

With external economies of scale, if the free trade price increases with trade.

4. How important is intra industry trade in world trade? What proportion of world trade is intra industry trade?

Over 75%

between 50 and 75%

between 25 an 50%

less than 25%

Answer 1

The external economies of scale are said to happen due to larger changes which takes place within an industry. Thus, when an industry grows there is subsequent decrease in the average costs of the business. In the case of trade which is based on the external economies of scale, the pattern of trade is determined could be determined by history and accident. There are countries in the world which are large producers in specific industries, and this has helped them to remain large producers of a product even when there exists another country in the market which could produce potentially more cheaply. Thus, in the case of trade based on external economies of scale, the pattern of trade is determined by history and accident. The dynamic returns to scale are said to exist when the average cost falls with the cumulative production over time. In economics of trade, the dynamic increasing returns to scale would imply that there are dynamic external economies of scale. Thus, dynamic returns to scale refer to the average cost fall with cumulative production over time. 3. In the situation of the Ricardian model, when free trade price equals to the country's autarky price a country may lose. This is because it is possible that before trade a country was able to obtain goods at a lower price and after free trade the price might increase which will hurt the buyers of the country. Thus, in the situation of the Ricardian model, when free trade price equals one of the countries' autarky price.