6. In the Brander-Spencer model (e.g., Airbus vs. Boeing example in Lecture 23)

Question

6. In the Brander-Spencer model (e.g., Airbus vs. Boeing example in Lecture 23) the subsidy raises profits by more than the subsidy because of A) the military-industrial complex. B) the "multiplier" effect of government expenditures. C) the economies of scale once the company enters the market. D) the forward and backward linkage effects of certain industries. E) the deterrent effect of the subsidy on foreign competition 7. Product differentiation and internal economies of scale yield gains from trade in the form of A) the proximity-concentration effect. B) a proliferation of competitive firms. C) higher profits and lower trade costs. D) lower production costs and a greater variety of goods. E) the substitution of immigration for foreign direct investment. 8. Working conditions for clothing workers in Bangladesh are very poor. If countries refuse to buy clothing from Bangladesh in order to encourage change, the effect is likely to be that A) firms will try to comply and workers will be worse off. B) firms will try to comply and workers will be better off C) firms will refuse to comply, but workers will be better off. D) firms will be forced to comply and workers will be better off. E) regardless of how firms respond, workers will be better off.

Explanation / Answer

If Airbus gets a subsidy from the European Union then Boeing will be deterred from entering the industry. Hence, this will generate profits for Airbus. This government policy which gives a domestic firm a strategic advantage in production is called a strategic trade policy and the subsidy raises profits more than the amount of the subsidy itself because of its deterrent effect on foreign competition.

Product differentiation and internal economies of scale yield gains from trade in the form of lower production costs and a greater variety of goods. Economies of scale means that production at a larger scale (more output) can be achieved at a lower cost (i.e., with economies or savings).

Cutting off the country’s only substantial source of foreign capital would likely only make the chaos worse. Hence firms will try to comply and workers will be worse off.

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