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The Role of External Economies in U.S. Manufacturing

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  • Ricardo J. Caballero
  • Richard K. Lyons

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%.

Suggested Citation

  • Ricardo J. Caballero & Richard K. Lyons, 1989. "The Role of External Economies in U.S. Manufacturing," NBER Working Papers 3033, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3033
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    References listed on IDEAS

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    1. John S. Chipman, 1970. "External Economies of Scale and Competitive Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 347-385.
    2. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    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 511-525, October.
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