HI5016 Week 10: Economies of Scale in International Trade Report

This report delves into the concepts of internal and external economies of scale within the context of international trade. It begins by defining economies of scale and highlighting the role of globalization in facilitating international trade. The report then explores internal economies, detailing various categories such as technical, financial, marketing, and managerial economies, and illustrates their impact through examples like Ford's expansion. Subsequently, the report examines external economies of scale, including economies of concentration, information, and specialization, and how these are influenced by international trade. It uses examples like the comparative advantage of the United States in chemical production and the role of financial institutions in supporting firms involved in international trade. The report concludes by emphasizing the importance of economies of scale for firms to remain competitive in the global market, especially with the increasing competition in the international trade.

INTERNAL ECONOMIES OF SCALE AND EXTERNAL ECONOMIES OF
SCALE
Introduction
Globalization has enabled the integration of
consumer groups and various factors of
production from different countries’ markets
(Ethier, 2012, p.389)
Many countries have encouraged and
supported their domestic industries to enter
international trade and improve their
economies

Economies of scale
Definition
Economies of scale refer to benefits that
enterprises get considering their scale of
operation (Koshal, 2012, p.147)
Scale of operation refers to the amount of
output it produces
The cost per unit of output produced
decreases as the scales of production increase

International trade
Contributes much towards availing various
economies of scale to various countries’
industries and individual firms
More resources, new foreign markets
potentially profitable and new factor inputs are
available on larger scale
Provided economies of scale improves firm’s
specialization and operational efficiency
(Vernon, 2012, p.415)

Internal economies of scale
Definition: Refers to merits which arise due to development
of particular firm (Krugman, 2010, p.950)
Categories
Technical economies of scale
Financial economies (Benston, 2010, p.321)
Marketing economies
Labor economies
Managerial economies
Risk bearing economies
Transport and storage economies

Internal economies of scale and international trade
Many businesses of late have embraced
international trade due to its merits
It has enabled firms to expand their
operations since they access to diverse
markets. FORD has expanded its operations to
different countries including India
Firms have improved their efficiency due to
stiff competition in international trade

External economies of scale
Definition: refers to merits which occur due to increase in
industry number of firms (Chipman, 2010, p.347)
Firms in the industry develop as their number in the
industry increases
Categories
Economies of concentration (Bain, 2014, p.15)
Economies of information (Hausmann & Klinger, 2010,
p.146)
Economies of specialization/disintegration (Fung, Gul &
Krishnan, 2012, p.1281)

External economies of scale and international trade
International trade enables firms to enjoy
specialization/integration economies of scale. Comparative
advantage determines specialization (Harkness & Kyle, 2015,
p.13). United States countries have comparative advantage in
production of chemicals. They include Saudi Arabia, Kuwait and
Mexico
International trade has enabled the flow of information about
markets to firms trading together (Wong, 2010, p.415).
International trade has led to development of financial
institutions to avail funds to these firms in terms of loans for
their expansion (Baltensperger, 2012, p.46). Examples are World
Bank and International Monetary Fund

Conclusion
With globalization, most firms have entered the
international trade so as reap its benefits (Levitt,
2013, p.249)
International trade brings together firms from
different countries with the purpose of trading and
making profit
International trade is highly competitive and firms
must utilize the economies of scale in it for them to
be efficient in production and remain competitive.