**Understanding Returns to Scale in International Trade**In the classical theory of international trade, one of the assumptions is constant returns to scale. However, most production activities encounter decreasing returns to scale. This difference can significantly affect how industries operate on a global scale.**Constant Returns to Scale:** This occurs when an increase in input results in a proportional increase in output. For example, doubling the inputs in a factory will double the production output, maintaining efficiency.**Decreasing Returns to Scale:** In contrast, decreasing returns to scale happen when output increases by a lesser proportion than the increase in inputs. For instance, continuing to add inputs to a crowded workspace might lead to inefficiencies and smaller output gains.**Production Function Explanation:** To illustrate these concepts, consider a production function that shows the relationship between inputs and outputs. In a graph, a straight line from the origin would indicate constant returns to scale, as output increases consistently with input. Meanwhile, a curve that flattens indicates decreasing returns to scale, where output grows slower as more inputs are added.Understanding these differences helps economists and policymakers develop strategies that account for real-world production dynamics, balancing trade assumptions with practical production realities.

One of the assumptions of classical theory of international trade is constant returns to scale but most production activities face decreasing returns to scale. Explain the difference between these concepts using a production function.

One of the assumptions of classical theory of international trade is constant returns to scale but most production activities face decreasing returns to scale. Explain the difference between these concepts using a production function.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: In order to conjecture the circumstances in these two countries under free trade, consider the…

A: Relative demand is the total quantity demanded of good-1 relative to the total quantity demanded of…

Q: In the H-O model, a country that exports one product and imports a different product is called…

A: Intra Industry Trade (IIT) denotes the trading between two countries of similar products belonging…

Q: According to globalization opponents, what is a disadvantage of globalization? Multiple Choice Free…

A: Globalization refers to the process of increasing interconnectedness and integration of economies,…

Q: Trade theory cannot account for the empirical fact of intra-industrial trade (i.e. that countries…

A: According to trade theory, a country's economic well-being is based on the production of commodities…

Q: Countries A and B have two factors of production, capital and labor, with which they produce two…

A: Given,Two countries = A and BFactors of production = Capital (K) and labor (L) Two goods = X and YX…

Q: Define the differences between the classical, country-based trade theories and the modern,…

A: The objective of this question is to understand the differences between classical, country-based…

Q: Which of the following identifies an important reason why empirical studies find that joining the…

A: In 1973, when Britain joined the European Economic Community (EEC), it had faced a substantial net…

Q: Use the Gravity Model to explain why China, Japan, Mongolia, North Korea, South Korea, and Taiwan…

A: According to the gravity model of international commerce, the amount of trade between two nations is…

Q: Liberal and Realist perspectives on free trade from a US policy perspective. Are there conditions…

A: According to liberalism, state priorities, instead of state capabilities, are the main determinant…

Q: Which of the assumptions of comparative advantage seem unrealistic? Fixed technology and imperfect…

A: Trade is defined as the exchange of commodities and services across the boundary of the country.

Q: Question 41 We found in our Ricardian lecture that the pattern of trade between countries was…

A: The measure that depicts the exchange of goods and services between two countries is known as trade.…

Q: Explain what is Standard Trade Model.

A: Definationstion of international trade: According to Wasserman and Haltman, “International trade…

Q: One of the assumptions of classical theory of international trade is constant returns to scale but…

A: Answer- One of the assumption of classical theory of international trade is constant to scale but…

Q: Clearly explain and illustrate the gains from exchange and the gains from specialization?

A: The gains from exchange and specialization are two fundamental concepts in economics that explain…

Q: LABOR-INTENSIVE GOODS 10 a co 2 1 0 0 1 2 3 6 7 CAPITAL-INTENSIVE GOODS 8 Once trade begins, the…

A: The capital intensive goods requires investment over the good to make constant improvement. Usually,…

Q: Suppose that you are a low-skilled worker employed in a labor-intensive industrial sector and the…

A: Here, it is given that the population of the country is declining continously, and an individual is…

Q: QUESTION 33 Ricardo's theory of trade is based on (A: productivity of labor; B: doportunity cost; C:…

A: Note: We’ll answer the first question since the exact one wasn’t specified. Please submit a new…

Q: If a scale economy is the dominant technological factor defining or establishing comparative…

A: The answer is as follows:-

Q: Use the three-panel internal economies of scale diagram to show the overall impact of trade…

A: The three-panel internal economies of scale diagram typically includes a Home Market Panel, a…

Q: Question 1: Why do the developed countries impose trade restrictions today on their labor intensive…

A: The Stolper-Samuelson theorem is an monetary concept that explains the relationship between trade,…

Q: For any economy, "regulated trade" (trade with barriers) is always preferred to both "free trade"…

A: Free trade is a policy or practice in international economics where governments do not restrict or…

Q: trade

A: As trade barriers are eliminated, certain goods may be cheaper to obtain overseas than to make…

Q: (a) (b) (c) (d) (e) (f) Answer ALL parts of this question. Britain and France are countries in a…

A: Absolute Advantage is a situation where one country can produce a higher quantity of the product for…

Q: (a) Based on the H-O assumptions, which good should Vincyland export, and why? (b) What trade…

A: Note: As per guideline answer will be only three first parts (a), (b), and (c).Based on differences…

Q: What is meant by complete specialization? By incomplete specialization? Under the Ricardian model,…

A: Ricardian model states how there would be the two countries that can produce two goods and how there…

Q: Explain the basic premise of the gravity model of trade and why it is commonly used to model trade…

A: The gravity model of trade is a fundamental framework used in economics to analyze and predict…

Q: The gravity model of international trade predicts that the trade volume between any two countries…

A: The gravity model of international trade was introduced by Walter Isard in the year 1954. This model…

Q: Assume that Trinbago is a small country that produces wine and motor vehicles, where motor vehicles…

A: The Heckscher-Ohlin (H-O) trade model is an economic theory that explains patterns of international…

Q: Standard trade Model When comparing the agricultural sectors of the USA and the UK, we can analyze…

A: The standard trade model, also known as the neoclassical trade model or the Ricardian model, is an…

Q: In the specific factor model, suppose that Nation 1 and Nation 2 have identical labor endowments,…

A: The specific factor model is considered to be the variation of the Ricardian model. and hence it is…

Q: Suppose the Heckscher-Ohlin model was modified to allow for technology differences to exist between…

A: The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can…

Q: Match the following Regional Trade Agreement examples to the Type of Regional Trade Agreement to…

A: Customs Union: A customs union is the substitution of a single customs territory for two or more…

Q: In the Heckscher-Ohlin-Vanek model, labour productivities in the production of a good in the…

A: Heckscher-Ohlin-Vanek model The Heckscher-Ohlin model was created to forecast international trade…

Q: In the Heckscher-Ohlin model the factor that a country is abundant in will gain from trade, i.e. its…

A: The Heckscher-Ohlin model suggests that countries export what they are best at producing in…

Q: The gravity model of trade describes an exact physical relationship between trade, distance and size…

A: "The statement is FALSE."

Q: Two economies have endowments (K,L) = (100,200) and (K*,L*) = (110,190). With the technology in…

A: “Since you have posted multiple questions, we will provide the solution only to the first question…

Q: outh. What is Import Substitution Industrialization, and what policy tools did states use to attempt…

A: Industrialization describes the process of transformation of the economic and social characterized…

Q: Consider the Hecksher-Ohlin model. Let the total endowment of capital in Home and Foreign be 30 and…

A: Here, according to the given information, it can be said that Home has higher capital and labor than…

Q: Consider the Heckscher-Ohlin-Samuelson model for the US producing 2 goods (digital cameras and…

A: Eli Heckscher and Bertil Ohlin created the Heckscher–Ohlin model (H–O model), which is a general…

Q: Free trade is beneficial only if a country is more productive than foreign countries.

A: When goods and services could be sold and bought without having any restrictions or tariffs then it…

Question

**Understanding Returns to Scale in International Trade**

In the classical theory of international trade, one of the assumptions is constant returns to scale. However, most production activities encounter decreasing returns to scale. This difference can significantly affect how industries operate on a global scale.

**Constant Returns to Scale:** This occurs when an increase in input results in a proportional increase in output. For example, doubling the inputs in a factory will double the production output, maintaining efficiency.

**Decreasing Returns to Scale:** In contrast, decreasing returns to scale happen when output increases by a lesser proportion than the increase in inputs. For instance, continuing to add inputs to a crowded workspace might lead to inefficiencies and smaller output gains.

**Production Function Explanation:** To illustrate these concepts, consider a production function that shows the relationship between inputs and outputs. In a graph, a straight line from the origin would indicate constant returns to scale, as output increases consistently with input. Meanwhile, a curve that flattens indicates decreasing returns to scale, where output grows slower as more inputs are added.

Understanding these differences helps economists and policymakers develop strategies that account for real-world production dynamics, balancing trade assumptions with practical production realities.

Expert Solution

Step 1

The production function depicts the technical association between the quantities of output (Q) that can be produced by a given amount of inputs.

Step by step

Solved in 2 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Compare Hecksher Ohlin Trade Theory and new trade theories in terms of a) basis of trade, b) pattern of trade and c) gains from trade.Explain your answer in detail and draw graphs if necessary.
Question 8 d e and f Please help solve 8 d e and f
In the Heckscher-Ohlin model with trade the wage in a country that produces both goods will depend on its labour abundance. True False
In the specific factor model with labour as a mobile factor, introducing trade lowers the welfare of workers increases output and consumption in the world. increases the welfare of all the owners of specific factors in Home. induces a Pareto improvement for the economy that exports more.
A and B are two similar countries producing pendrives, with the only difference being that A has more experience in the production of the same. Under what conditions, can B out-compete A in the world trade market? Explain with the help of the concept of dynamic increasing returns.
NAFTA is a trade agreement that was negotiated by the leaders of three countries. Which of the following countries was not part of this agreement? the United States Cuba Mexico Canada
To understand the differences in global trade operations in comparison to those carried out between international business partners. A lot of managers within our society will only concern themselves with how to conduct business within their own communities or within their own country for that matter. However, larger organizations will require a manager to be more adept at dealing with business partners from different cultures. Please compare and contrast nationalism with globalism, and explain what are the pros and cons of each paradigm?
QUESTION 3 In the Heckscher-Ohlin model with trade the wage in a country that produces both goods will depend on its labour abundance. True False
Explain, with a two-country, two-good model, why the Heckscher-Ohlin model predicts only partial specialisation in the production of two goods, while Ricardo's comparative advantage model predicts full specialisation when opening up to international trade. You can opt to present your explanation with the aid of diagrams.
Why might it be argued that corporations do not have a comparative advantage when investing in real estate as means of diversification from core business?
Which of the following is not limitation of the concept of terms of trade? Select one: a) Base year choice is difficult b) Quality of goods changes c) There are no limitations d) International competitiveness may be compared e) Different countries may use different formulas
The gains from specialization and trade are based on absolute advantage. Question 4 options: a) True b) False