ECO2/3ITR

International Trade
Tutorial 6 (Class 7) Questions

True/False Questions

1. External economies of scale are productivity gains that arise from the growth of
the industry, while internal economies of scale are productivity gains that arise
from growth of a particular firm.
True or False? Explain.

2. The main sources of external economies of scale are: specialised suppliers, labour
pooling and knowledge spillovers.
True or False? Explain.

3. The industry’s supply curve with external economies of scale is the traditional
upward sloping curve.
True or False? Explain.

Question 4
Consider the following industries in autarchy in China and the US.

a. What would be the pattern of trade if the two countries were free to trade?
b. What would be the effect on world prices of buttons?
c. Do both countries gain from trade?
d. Illustrate with a graph a situation where one country may lose (overall!) from
free trade when trade is generated by external economies of scale.

1
Question 5

Recently, a growing labour shortage has been causing Chinese wages to rise. If this
trend continues, what would you expect to happen to industries with external
economies of scale in China? Use as a starting point the situation described in the
following graph.