6 Alternative Theories of Trade Concepts Minimum Efficient Scale MES Lowest output level at which the firm exhausts all iEOS Hysteresis Current equilibrium depends importantly on past random events Alternative Theory 1 iEOS and Hysteresis Assumptions 1 All firms in the world have identical LRATC curves Simplifying 2 Each firm has significant iEOS Critical 3 The MES of each firm is large relative to the maximum global market for the good Critical Conclusions 1 Few firms exist in the global market in the LR 2 Historical accident determines which particular countries firms will produce the good 3 Production and comparative advantage can arise naturally in new countries if the global market expands Alternative Theory 2 eEOS and Hysteresis Assumptions Conclusions good 1 Significant eEOS for all producers within a single country Critical 1 Potential cost advantages arising from the eEOS leads to the clustering of firms within a specific country 2 Historical accident determines which particular country will produce the 3 New clusters countries can only begin producing the good if the eEOS enjoyed by existing firms are exhausted eg if the industry reaches a certain size Or else as the global market expands production in the current exporting countries increase rather than having new clusters forming in new countries 6 Alternative Theories of Trade Alternative Theory 3 Monopolistic Competition and Variety Assumptions 1 Firms produce a differentiated product Critical 2 MES for each firm is large relative to the domestic market but smaller relative to the maximum possible global market Critical 3 All firms producing have identical LRATC curves Simplifying 4 Total domestic demand curve for the product is the same in all countries Simplifying Conclusions 1 Consumers can have more variety without any increase in prices 2 Trade will more likely lead to lower prices for consumers than autarky 3 Comparative advantage doesn t determine who produces what