What Are The Two Sources of Economies of Scale? How Do These Economies of Scale Lead to Intra-Industry Trade?
Economies of scale are the benefits accrued when a firm can produce a good or a service on a large scale at no additional cost (Feenstra & Taylor, 2017). The two sources of economies of scale are division of labor and specialization. Division of labor entails the delegation of specific steps of the production process to different people to increase efficiency (Feenstra & Taylor, 2017). Specialization, on the other hand, involves the assignment of specific tasks to particular individuals who do them continuously until they become competent and experts in that task.
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The economies of scale facilitate the Intra-industry trade which is the exchange of same goods within an industry (Feenstra & Taylor, 2017). The Intra-industry trade thrives on the possession of a comparative advantage in the firms involved. The ability of the company to produce high-quality goods at a cheaper cost gives them a competitive edge in the market place (Feenstra & Taylor, 2017). Their ability to produce the goods at lower prices and with different specifications facilitates the intra-trade since different production processes require specified raw materials. For instance, an industry can import or buy one kind of steel and export or sell another kind of steel. Since their economies of scale allow them to produce the one they import at a cheaper cost and acquire the one generated by another company in the same industry at a lower price the demand and supply make room for trade (Feenstra & Taylor, 2017). Economies of scale, therefore, lead to intra-industry trade by cutting production costs and facilitating the production of high-quality goods giving the companies a comparative advantage and a competitive edge as well.
Which of The Following Are Foreign Direct Investments (FDI) And Which Are Not?
Foreign direct investment refers to an investment in the form of a controlling ownership in business in one country by a foreign business entity (Feenstra & Taylor, 2017). The first scenario where a German man buys $10 million of Toshiba stock on the Tokyo Stock Exchange is a form of a foreign portfolio investment and not a foreign direct investment. Unlike foreign direct investment, the stocks are readily tradable, are more temporary and do not give the holder a controlling power in the company's decision-making process (Feenstra & Taylor, 2017). The second scenario involves a Frenchman buying an apartment building in Rome Italy which is a form of foreign direct investment. By building the apartment, the Frenchman intends to participate in the management of the assets which is a characteristic of a foreign direct investment (Feenstra & Taylor, 2017). The third scenario where A German Company merges with a British company and the stockholders in the British company exchange their stock for shares in the German firm is a form of a foreign direct investment in the form of a joint venture. The stockholders from both companies hold investments in foreign countries (Feenstra & Taylor, 2017). The fourth scenario where a Korean firm builds a plant in Brazil and manages the facility as a contractor to the Brazilian government is a direct investment since it involves the creation of a physical asset.
Explain The Differences between Mongolia and Malaysia’s Trading Patterns Using the Gravity Model
The gravity model describes the trade relationships among countries based on distance and the gross domestic product (Feenstra & Taylor, 2017). Mongolia trades mainly with China with their exports including minerals, animal products, and textiles. The gravity model states that the international geographical trade is influenced by the distance between the two countries in 1,000 nautical miles. The reason that Mongolia mainly trades with China unlike Malaysia which trades with several countries is due to its geographical location since it is for it is Landlocked and 1724 Km from the nearest seaport (Feenstra & Taylor, 2017). The model also postulates that the amount of trade is determined by the economic size of the trading countries measured in terms of the GDP. The Malaysian GDP in 2016 was 296,359M. $ compared to the Mongolian GDP of 11,031M. $. The GDP is a reflection of the size of the economy and its purchasing power, and in order to avoid a balance of payment deficit, the smaller economies engage in less trade just like in the case of Mongolia and Malaysia. The GDP of Mongolia is therefore a determinant of the volume of imports and exports the economy can take and explains why Malaysia has more trade partners than them.
Why Complete Wage Equalization Does Not Occur and What Will Happen To Capital in High Wage Countries If Stringent Restrictions Are Imposed On Migration
Labor mobility refers to the ability of workers to move with ease within an economy or from one economy to the next (Feenstra & Taylor, 2017). It can either be occupational or geographical with occupational labor mobility referring to the movement from one job to the other while geographic mobility refers to movement from one location to the next. Perfect labor mobility can equalize wage rates theoretically, but in reality, the equalization is impossible due to several factors (Feenstra & Taylor, 2017). The inability of organizations to pay the desired wages, the forces of demand and supply in the labor market, the prevalent market rates, the cost of living and the influence of trade unions hinder it. Additionally, if stringent restrictions are imposed on migration the capital in high wage countries will be negatively affected. The demand and supply forces for human capital will be upset since the number of people joining the labor force will decrease. The effect will be high labor cost, reduced productivity due to labor shortage and capital flight since investments will be discouraged by the stringent migration laws (Feenstra & Taylor, 2017). The stringent migration laws will, therefore, affect the productivity and productivity of the industries in the high wage countries.
References
Feenstra, R. C., & Taylor, A. M,. (2017). International trade (4th ed.). New York: Worth.
