The Role of External Economies in U.S. Manufacturing

32 Pages Posted: 14 Apr 2007 Last revised: 17 Apr 2022

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: July 1989

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-digitindustry 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

Caballero, Ricardo J. and Lyons, Richard K., The Role of External Economies in U.S. Manufacturing (July 1989). NBER Working Paper No. w3033, Available at SSRN: https://ssrn.com/abstract=979941

Ricardo J. Caballero (Contact Author)

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Richard K. Lyons

University of California, Berkeley ( email )

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