4 External Economies External economies of scale are a driving force of industrial clusters.

4.1. Give two examples of sources for external economies of scale. [You may try to avoid examples from class; as is generally the case, thinking of own examples helps solidify ideas.]

4.2. Suppose a country with a large internal (domestic) consumer market wants to launch an electronics industry. No entry occurs although average production costs would be lower than anywhere else in the world at any given scale. The government hires you as a consultant. Explain why no domestic entry might occur. What policy options can you offer the government? What are their advantages and disadvantages? For how long should the policies remain in place? [You may use numeric examples, graphs, or clear verbal arguments for your answers.]

4.3. Explain why an export subsidy worsens a country's terms of trade. Under what conditions may export promotion, such as East Asian economies used to pursue it, be preferable to import protection, such as other developing economies used to pursue it under Import Substitution Industrialization?