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Button city in china7/11/2023 It is very different from trade models without increasing returns to scale, where relative prices converge to a median of prices post international trade. It means that the prices that were already lower in the pre-trade period further decrease once international trade takes place, meaning that the post-trade prices are lower than in any country involved in production. The effect of the concentration of production on prices allows China to further lower its button prices due to the increased production due to world demand. This trade also has another peculiar advantage. It means that as trade opens up, in the sense that countries can choose to trade buttons with each other, the cheaper availability in China becomes a much better alternative for the rest of the world because of their pricing than elsewhere in the world.Īs a result, China dominates the specialization of the button industry and meets a substantial proportion of the world’s demand for buttons through its domestic production. Together, these parameters contribute to the external economies of scale-led button industry being initially priced at a lower rate in China in a pre-trade economy than in any other country. Similarly, Bangalore might not be what it is today if vagaries of local politics had not led Texas Instruments to choose to locate their investment project there, back in 1984, rather than in any other Indian city. It has retained that role even though the canal is now used only for recreational boats. Historical contingency refers to the initial advantage given to a particular location in a specific industry, which gets locked in by external economies of scale even when those circumstances that created the initial advantage are no longer relevant.įor Example- New York became the financial center of the United States thanks to the Erie Canal, which made it the nation’s leading port. Well, the answer to it lies in the presence of historical contingency. But, why couldn’t Vietnam, which also has labor endowment advantage, or India, with low labor wage rates, has China’s dominance? It shows that comparative advantage partially explains the pattern of the trade. As a result, the relative cost of production is much less in China than in the United States, where 40 percent labor force is skilled, or Germany, where hourly wage rates are amongst the highest globally.Ģ. It is also known that China has a relative labor supply advantage due to its relative endowment and availability benefits over other countries, meaning that the rental cost of labor is comparatively much less due to the competitive environment.Īgain, market prices reflect the relative scarcity of a good, provided absence of any externalities. Button industry, as opposed to, say, the financial services industry, is a labor-intensive industry, primarily requiring abundant unskilled labor. China has a relative advantage in the production of buttons due to two primary reasons-ġ. Let’s first consider pre-trade conditions of the button industry compared to other countries. While the implications of these forward-falling supply curves are limited for the domestic economy, the post-trade results are somewhat very intriguing. Note that this is a unique case of a supply curve for a competitive market, which usually prevails in external economies of scale. Instead of a regular upward-sloping supply curve, the industry supply curve for an industry that takes advantage of external economies of scale is forward falling since additional production costs are consistently declining. Now, the case of an external economy is different because the market conditions it offers, both pre-and-post international trade, are severely different from those usually observed in the market space. It primarily means that the world supply of buttons emerges from a small town in China that cherishes the advantages of an external economy.
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