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#7 – Michael Mauboussin: The Fascinating World of Increasing Returns
Scaling Theory
Trade Unleashes Comparative Advantages and Learning
Both tangible and intangible businesses benefit from economies of scale, as highlighted by the insights of David Ricardo and Paul Krugman. Ricardo's concept of comparative advantage laid the groundwork for international trade, while Krugman introduced the idea that similar countries can trade effectively through specialization, leading to increasing returns. This occurs as nations focus on specific sectors, allowing them to enhance efficiency and reduce costs over time. Furthermore, the principle of 'learning by doing' illustrates that increased production leads to decreased costs; empirical evidence from aircraft engineering demonstrates that doubling output can reduce costs by approximately 20%.
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