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The Role of External Economies in U.S. Manufacturing

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Ricardo J. Caballero
Richard K. Lyons

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Abstract

This paper develops a method for joint estimation of both the degree of internal returns to scale and the extent of external economies. We apply the method in estimating returns to scale indexes for U.S. manufacturing industries at the two-digit level. Overall, we find that only three of the twenty industry categories show any evidence of internal increasing returns: (1) Primary Metals, (2) Electrical Machinery, and (3) Paper Products. More striking, however, is the very strong evidence of the existence of external economies, where external is defined as external to a given two-digit industry and internal to the U.S.. According to our preferred estimates, if all manufacturing industries simultaneously raise their inputs by 10%, aggregate manufacturing production rises by 13%, of which about 5% is due to external economies. Thus, when an industry increases its inputs in isolation by 10%, its output rises by no more than 8%.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3033.

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Date of creation: Jul 1989
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Handle: RePEc:nbr:nberwo:3033

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  1. Caballero, R.J. & Lyons, R.K., 1989. "Internal Versus External Economies In European Industry," Discussion Papers 1989_10, Columbia University, Department of Economics.
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  2. Chipman, John S, 1970. "External Economies of Scale and Competitive Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 347-85, August. [Downloadable!] (restricted)
  3. Chang, Winston W, 1981. "Production Externalities, Variable Returns to Scale, and the Theory of Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 511-25, October. [Downloadable!] (restricted)
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