Chapter 5 The Standard Trade Model
Chapter 5 ▪ The Standard Trade Model
Chapter organization Introduction A Standard Model of a Trading Economy International Transfers of Income: Shifting the RD Curve Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD Summary Appendix: Representing International Equilibrium with offer curves Copyright C 2003 Pearson Education, Inc Slide 5-2
Copyright © 2003 Pearson Education, Inc. Slide 5-2 Chapter Organization ▪ Introduction ▪ A Standard Model of a Trading Economy ▪ International Transfers of Income: Shifting the RD Curve ▪ Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD ▪ Summary ▪ Appendix: Representing International Equilibrium with Offer Curves
Introduction Previous trade theories have emphasized specific sources of comparative advantage which give rise to international trade Differences in labor productivity(Ricardian model) Differences in resources(specific factors model and Heckscher-Ohlin model The standard trade model is a general model of trade that admits these models as special cases Copyright C 2003 Pearson Education, Inc Slide 5-3
Copyright © 2003 Pearson Education, Inc. Slide 5-3 Introduction ▪ Previous trade theories have emphasized specific sources of comparative advantage which give rise to international trade: • Differences in labor productivity (Ricardian model) • Differences in resources (specific factors model and Heckscher-Ohlin model) ▪ The standard trade model is a general model of trade that admits these models as special cases
a Standard model of a Trading Economy The standard trade model is built on four key relationships Production possibility frontier and the relative supply curve Relative prices and relative demand World relative supply and world relative demand Terms of trade and national welfare Copyright C 2003 Pearson Education, Inc Slide 5-4
Copyright © 2003 Pearson Education, Inc. Slide 5-4 A Standard Model of a Trading Economy ▪ The standard trade model is built on four key relationships: • Production possibility frontier and the relative supply curve • Relative prices and relative demand • World relative supply and world relative demand • Terms of trade and national welfare
a Standard model of a Trading Economy Production Possibilities and Relative Supply Assumptions of the model Each country produces two goods, food (F)and cloth(C Each countrys production possibility frontier is a smooth curve(TT) The point on its production possibility frontier at which an economy actually produces depends on the price of cloth relative to food, PdP Isovalue lines Lines along which the market value of output is constant Copyright C 2003 Pearson Education, Inc Slide 5-5
Copyright © 2003 Pearson Education, Inc. Slide 5-5 A Standard Model of a Trading Economy ▪ Production Possibilities and Relative Supply • Assumptions of the model: – Each country produces two goods, food (F) and cloth (C) – Each country’s production possibility frontier is a smooth curve (TT) • The point on its production possibility frontier at which an economy actually produces depends on the price of cloth relative to food, PC /PF . • Isovalue lines – Lines along which the market value of output is constant