In the presence of external economies of scale, trade
A) will unambiguously improve welfare in both countries.
B) will unambiguously worsen welfare in the exporting country and improve welfare in the importing country.
C) may or may not improve welfare in both countries.
D) will unambiguously improve welfare in the exporting country and worsen welfare in the importing country.
E) will unambiguously worsen welfare in both countries.

Question

Quizplus · Accepted Answer

External economies of scale refer to the benefits that arise from increased production at the industry level, and not just within a specific firm. In the presence of these economies of scale, trade may or may not improve welfare in both countries. If both countries specialize in the production of the goods that benefit from external economies of scale, then trade will lead to lower costs of production and improved welfare for both countries. However, if only one country specializes in the production of these goods and the other country does not, then the country that specializes will experience greater gains, while the other country may experience losses. In other words, the impact of trade on welfare depends on the pattern of specialization and trade between the countries.

In the Presence of External Economies of Scale, Trade