INTERNATIONAL TRADE

International Trade

International Trade

Introduction

International trade has increased in the past few years, which means that countries are exchanging goods and services at an increased rate. This benefits both the countries i.e. the importer, as well as, the exporter. This helps them in managing their products, services and the funds generated by this activity are useful for the country because it earns foreign currency. According to Obsfeld and Krugman (2009) international trade can be explained as “Trading at international level has enabled the countries to get specialization in the production of narrower goods ranging, giving away greater amount of efficiencies at the larger production level” This definition highlights the concept of economies of scale and also that the countries must possess resources that it is trading.

Economies of Scale

The economies of scale are categorized as external or internal, both of them have different factors involved. The external EOS (economies of Scale) is known to be occurring when per unit cost is depending over the industry size but not essentially over the size of the companies in the industry. On the other hand, internal EOS is supposed to be occurring when per unit cost is depending over the firm sizes but not essentially over a particular firm's size. Internal EOS is the firm's efficiency of producing a particular product, as per unit cost produced is dependent over the size of that firm and not the size of that industry. This is considered to be different from external EOS as cost is not dependent over the industry but the company itself.

Economies of scale can be explained as the increased production efficiency in the number of goods that is being produced. Usually, a company that is able to lower the average cost per unit by increasing the production is known to achieve the economies of scale. A company is successful in doing so because the fixed cost is shared over the increased number of products produced. Economies of scale has huge advantages for companies especially the big companies because it allows them to access huge markets which gives them the advantage to operate in greater geographical areas. For companies that are small and medium have size limits due to which they are not able to benefit from the economies of scale. Companies should take care that they do not increase the size of their firm after a specific point because if they do, they will have to incur an increase in the production costs and diseconomies of scale will occur.

According to Merrewijk (2002) the economies of scale means that production is being done at a broader level and could be accomplished at a fairly lower cost. It could be done in a much simple way by relating it to the production to the labor cost per unit. The following unit-labor requirement with economies of scale shows the relation between the two

Figure 1. “Unit-labor Requirement with Economies of Scale”.

Source:Steve Suranovic(2010)

By adjusting a little bit, it will be very easy to show the concept of increasing ...