Question

Suppose the production of clothing displays external economies of scale. Suppose further that clothing production is a labor-intensive process, and Country A is the most labor abundant country in the world. If Country A does not export any clothing, is the model of trade driven by external economies of scale incorrect, or flawed? Why or why not?

Answer 1

This model of trade is flawed here because external economic of sales will come outside of a company but with in the industry it is operating. Here Country A is having the reputation of most labour abundant country and the production of cloth is also labour intensive than if the country is not exporting its goods to other countries or other places than even if there is economic of sales in the industry that it is not external Economics of sales but it is only economics of sale. As the production cost of producing each output is decreasing but within in the country due to its labour abundance but if it is exporting the cloth output which it is producing than if the cost of production decrease than only it is due to external Economics of sales.

So the model of trade here is flawed.