EC 340 Lecture 5: Chapter 5 increasing return model
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-as we will later see, increasing returns to scale are fundamental force behind this phenomenon. -so far, we"ve emphasize cross-country differences in autarky prices as sources of trade from technology differences (ricardian model) or from factor endowment differences (h-o model) countries trade because they are different. -but the majority of world trade is between similar countries. -similarly, the models so far emphasize an intersectoral nature of trade flows (cloth for food) -in reality, a large fraction of world trade is intraindustry trade increasing return to scale. -previous models assumed constant returns to scale is all factor of production are doubled hen output will also double. -but a firm or industry may feature increasing returns to scale (or economies of scale) -a production technology exhibits irs if average cost (ac) decreases as output increases. Internal: ac of firm falls with increased firm output.
