How Can Free Trade Allow Firms or Industries to Take Advantage of Economies of Scale?
Trade between countries need not depend on country differences under the assumption of economies of scale. Indeed, it is conceivable that countries could be identical in all respects and yet find it advantageous to trade. For this reason, economies-of-scale models are often used to explain trade among countries like the United States, Japan, and the European Union. For the most part, these countries, and other developed countries, have similar technologies, similar endowments, and to some extent similar preferences. Using classical models of trade (e.g., Ricardian, Heckscher-Ohlin), these countries would have little reason to engage in trade. Yet trade between the developed countries makes up a significant share of world trade. Economies of scale can provide an answer for this type of trade.
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Mohamed Ramadan Hassanien, United States Bilateral Free Trade Agreements (Alphen aan den Rijn, The Netherlands: Kluwer Law International, 2010), 4. Web.
Joao Paulo Cerdeira Bento, Economic Integration, International Trade and the Role of Foreign Direct Investment (Berlin, Germany: Lit, 2009), 3. Web.