Question

Suppose there exists external economies of scale in an industry located in country X. If country X moves from free trade to autarky, it necessarily loses welfare. Explain in detail, using any relevant diagrams, whether the above statement is true, false or uncertain.

Answer 1

The above statement is false. Since the nation is enjoying external economies of scales, thereby the cost is decreasing over a wide range of output. Hence the nation is enjoying comparative advantage in the production of a particular.

However if the nation adopts a protectionist stance, by changing policies from free trade to autarky. Then the nation is likely to lose upon the national welfare. Autarky would be beneficial for the domestic producers who are inefficient. But since there is an existence of external economies of scale, autarky will likely to result into losing of foreign markets for the domestic producers