NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Role of External Economies in U.S. Manufacturing

Ricardo J. Caballero, Richard K. Lyons

NBER Working Paper No. 3033
Issued in July 1989
NBER Program(s):   ITI   EFG   IFM

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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Document Object Identifier (DOI): 10.3386/w3033

Published: "External Effects in U.S. Procyclical Productivity", Journal of Monetary Economics, May 1992, Vol. 24, pp.209-225

 
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