Question

in the presence of external countries of scale, trade 1. will unambiguously improve welfare in the...

in the presence of external countries of scale, trade
1. will unambiguously improve welfare in the exporting country and worsen welfare in the importing country.
2. may or may not improve welfare in both countries.
3. will unambiguously worsen welfare in exporting countries and improve welfare in the importing country.
4. will unambiguously improve welfare in both countries.
5. will unambiguously worsen welfare in both countries.

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Answer #1

The answer is option 4- will unambiguously improve welfare in both countries.

Economies of scale mean that manufacturing can be done at a reduced cost ( i.e. with economies or savings) on a greater scale (more manufacturing). Specialization and exchange will result in increases in world productive productivity and welfare benefits that accrue to all trading countries if output of a sector has this characteristic.

Trade between countries does not depend, on the presumption of economies of scale, on the disparities between countries. Indeed, it is possible that countries may, in all ways, be similar and still find trade beneficial.

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