Question

International Trade

(a) Define the concepts of external and internal economies of scale. Give examples and discuss their differences.

(b) Why are these two concepts important in international trade?

PLEASE EXPLAIN CAREFULLY

Answer 1

Solution A.

Internal economies of scale are used for measurement of company's efficiency of production which occurs due to factors controlled by its management.

External economies of scale happen due to gigantic changes within the sector, thus when businesses grow, average costs of business falls.

Internal economies of scale offer better competitive advantage and greater degree of exclusivity than external economies of scale.

Solution B.

Both concepts are exceptionally important in international trade as it helps firms understand businesses overview and industry overview, understanding the positive and negative externality, assessment of optimal prpduction capacity and amount of resources required for inventory optimisation.

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