The Standard Trade Model
克鲁格曼 国际经济学第10版 英文答案 国际贸易部分krugman_intlecon10_im_06_GE
Chapter 6The Standard Trade Model⏹Chapter OrganizationA Standard Model of a Trading EconomyProduction Possibilities and Relative SupplyRelative Prices and DemandThe Welfare Effect of Changes in the Terms of TradeDetermining Relative PricesEconomic Growth: A Shift of the RS CurveGrowth and the Production Possibility FrontierWorld Relative Supply and the Terms of TradeInternational Effects of GrowthCase Study: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations?Tariffs and Export Subsidies: Simultaneous Shifts in RS and RDRelative Demand and Supply Effects of a TariffEffects of an Export SubsidyImplications of Terms of Trade Effects: Who Gains and Who Loses?International Borrowing and LendingIntertemporal Production Possibilities and TradeThe Real Interest RateIntertemporal Comparative AdvantageSummaryAPPENDIX TO CHAPTER 6: More on Intertemporal Trade⏹Chapter OverviewPrevious chapters have highlighted specific sources of comparative advantage that give rise to international trade. This chapter presents a general model that admits previous models as special cases. This “standard trade model” is the workhorse of international trade theory and can be used to address a wide range of issues. Some of these issues, such as the welfare and distributional effects of economic growth, transfers between nations, and tariffs and subsidies on traded goods, are considered in this chapter.© 2015 Pearson Education LimitedThe standard trade model is based upon four relationships. First, an economy will produce at the point where the production possibilities curve is tangent to the relative price line (called the isovalue line). Second, indifference curves describe the tastes of an economy, and the consumption point for that economy is found at the tangency of the budget line and the highest indifference curve. These two relationships yield the familiar general equilibrium trade diagram for a small economy (one that takes as given the terms of trade), where the consumption point and production point are the tangencies of the isovalue line with the highest indifference curve and the production possibilities frontier, respectively.You may want to work with this standard diagram to demonstrate a number of basic points. First, an autarkic economy must produce what it consumes, which determines the equilibrium price ratio; and second, opening an economy to trade shifts the price ratio line and unambiguously increases welfare. Third, an improvement in the terms of trade (ratio of export prices to import prices) increases welfare in the economy. Fourth, it is straightforward to move from a small country analysis to a two-country analysis by introducing a structure of world relative demand and supply curves, which determine relative prices.These relationships can be used in conjunction with the Rybczynski and the Stolper-Samuelson theorems from the previous chapter to address a range of issues. For example, you can consider whether the dramatic economic growth of China has helped or hurt the United States as a whole and also identify the classes of individuals within the United States who have been hurt by China’s particular growth biases. In teaching these points, it might be interesting and useful to relate them to current events. For example, you can lead a class discussion on the implications for the United States of the provision of forms of technical and economic assistance to the emerging economies around the world or the ways in which a world recession can lead to a fall in demand for U.S. exports.The example provided in the text considers the popular arguments in the media that growth in China hurts the United States. The analysis presented in this chapter demonstrates that the bias of growth is important in determining welfare effects rather than the country in which growth occurs. The existence of biased growth and the possibility of immiserizing growth are discussed. The Relative Supply (RS) and Relative Demand (RD) curves illustrate the effect of biased growth on the terms of trade. The new termsof trade line can be used with the general equilibrium analysis to find the welfare effects of growth. A general principle that emerges is that a country that experiences export-biased growth will have a deterioration in its terms of trade, while a country that experiences import-biased growth has an improvement in its terms of trade. A case study argues that this is really an empirical question, and the evidence suggests that the rapid growth of countries like China has not led to a significant deterioration of the U.S. terms of trade nor has it drastically improved China’s terms of trade.The second area to which the standard trade model is applied is the effects of tariffs and export subsidies on welfare and terms of trade. The analysis proceeds by recognizing that tariffs or subsidies shift both the relative supply and relative demand curves. A tariff on imports improves the terms of trade, expressed in external prices, while a subsidy on exports worsens terms of trade. The size of the effect depends upon the size of the country in the world. Tariffs and subsidies also impose distortionary costs upon the economy. Thus, if a country is large enough, there may be an optimum, nonzero tariff. Export subsidies, however, only impose costs upon an economy. Internationally, tariffs aid import-competing sectors and hurt export sectors, while subsidies have the opposite effect.The chapter then closes with a discussion of international borrowing and lending. The standard trade model is adapted to trade in consumption across time. The relative price of future consumption is defined as 1/(1 r), where r is the real interest rate. Countries with relatively high real interest rates (newly industrializing countries with high investment returns for example) will be biased toward future consumption and will effectively “export” future consumption by borrowing from established developed countries with relatively lower real interest rates.Chapter 6 The Standard Trade Model 29Answers to Textbook Problems1.If the relative price of palm oil increases in relation to the price of lubricants, this would increase theproduction of palm oil, because Indonesia exports palm oil. Similarly, an increase in relative price of lubricants leads to a shift along the indifference curve, towards lubricants and away from palm oil for Indonesia. This is because Palm oil is relatively expensive, hence reducing palm oil consumption in Indonesia.Expensive palm oil increases the relative income of Indonesia. The income effect would induce more for the consumption of palm oil whereas the substitution effect acts to make the economy consume less of palm oil and more of lubricants. However, if the income effect outweighs the substitution effect, then the consumption of palm oil would increase in Indonesia.2.In panel a, the re duction of Norway’s production possibilities away from fish cause the production of fish relative to automobiles to fall. Thus, despite the higher relative price of fish exports, Norway moves down to a lower indifference curve representing a drop in welfare.In panel b, the increase in the relative price of fish shifts causes Norway’s relative production of fish to rise (despite the reduction in fish productivity). Thus, the increase in the relative price of fish exports allows Norway to move to a higher indifference curve and higher welfare.3. The terms of trade of the home country would worsen. This is because a strong biased productiontowards cloth would increase the home country’s supply of cloth and shifts the supply curve to the right. At the same time, the production of wheat would decline relative to the production of cloth. An increased supply of cloth would reduce the price at the domestic and at the international market. The reduction in international price of cloth would worsen the terms of trade of the home country as the home country exports. On the other hand, if the home country’s production grows in favor of wheat, the terms of trade would improve in favor of the home country. This is because wheat is imported by the home country.© 2015 Pearson Education Limited。
国际经济学英文第七版克鲁格曼英文经济名词翻译
国际经济学英文第七版克鲁格曼英文经济名词翻译Key Terms of International EconomicsChapter3 Labor Productivity and Comparative Advantage Comparative advantage 比较优势Absolute advantage 绝对优势Opportunity cost 机会成本Production possibility frontier 生产可能性边界Unit labor requirement 单位产品劳动投入Relative price 相对价格Relative demand curve相对需求曲线Relative supply curve 相对供给曲线Relative wage 相对工资Relative quantity 相对产量Ricardian model 李嘉图模型Pauper labor argument 贫民劳动论Nontraded goods 非贸易商品Chapter 4 Resources and Trade: the Heckscher-Ohlin Model Abundant factor 丰裕要素Biased expansion of production 偏向性生产扩张Equalization of factor prices 要素价格均等化Factor abundance 要素丰裕度Factor intensity 要素密集度Scarce factor 稀缺要素Leontief paradox 里昂惕夫悖论land-intensive 土地密集型Labor-intensive劳动密集型the ratio of 2 factor prices 要素价格比Wage-rental ratio 工资-租金比Land-labor ratio ，the ratio of land to labor 土地劳动比Chapter 5 The standard Trade ModelBiased growth 偏向性增长Export-biased growth 出口偏向性增长Immiserizing growth 贫困化增长Import-biased growth 进口偏向性增长Isovalue line等价值线Marginal propensity to spend边际消费倾向Terms of trade贸易条件Transfers of income转移支付Chapter 6 Economies of Scale, Imperfect Competition, and international TradeDumping 倾销External economies of scale外部规模经济Imperfect competition 不完全竞争Interindustry trade 产业间贸易Intraindustry trade 产业内贸易Internal economies of scale内在规模经济Monopolistic competion垄断竞争Reciprocal dumping 相互倾销Increasing return 报酬递增Chapter 7 The Instruments of Trade policyad valorem tariff从价税Specific tariff从量税Consumer surplus消费者剩余Producer surplus生产者剩余Production distortion loss生产扭曲损失Consumption distortion loss消费扭曲损失Effective rate of protection有效保护率Efficiency loss效率损失Export restraint出口限制Export subsidy出口补贴Import quota进口配额Voluntary export restraint自愿出口限制Local content requirement国产化程度要求nontariff barriers非关税避垒Quota rent配额租金Chapter 8 National Income Accounting and the Balance of Payments The Balance of Payment AccountsCurrent accountFinancial accountCapital accountChapter 9 Exchange Rates and the Foreign Exchange Market:An Asset ApproachAppreciation升值Arbitrage套汇、套利Depreciation贬值Exchange rate汇率Forward exchange rate远期汇率Interest parity condition利率平价条件Rate of appreciation升值率Rate of depreciation贬值率Real rate of return实际收益率Spot exchange rate即期汇率Vehicle currency载体货币Foreign exchange外汇Chapter 10 Money, Interest Rates, and Exchange ratesMoney Supply 货币供给Money Demand 货币需求Short-Run Price Rigidity 短期价格粘性Long-run Price Flexibility 长期灵活价格permanent increase in the U.S. money supply 货币供给永久性增长overshooting 超调Chapter 11 Price Levels and the Exchange Rate in the Long Run Law of one price 一价定律Nominal exchange rate 名义汇率Nominal interest rate 名义利率Purchasing power parity 购买力平价Real appreciation实际升值Real depreciation 实际贬值Real exchange rate 实际汇率Relative PPP相对购买力平价Market rigidity市场刚性Price rigidity价格刚性Price stickiness价格粘性Chapter 12 Output and the Exchange Rate in the Short Run Aggregate demand 总需求Fiscal policy 财政政策J-curve J曲线Real exchange rate 实际汇率Real appreciation 实际升值Real depreciation 实际贬值Chapter 13 Fixed, Floating Exchange Rate and Policies Effects Sterilization冲销Sterilized foreign exchange intervention冲销性外汇干预Devaluation法定贬值Revaluation法定升值Clean float 清洁浮动Dirty float 肮脏浮动Capital flight 资本抽逃Chapter 14 The Theory of Optimum Currency Areas optimumcurrency areas 最优货币区Monetary efficiency gain 货币效率收益Economic integration 经济一体化Floating exchange rate 浮动汇率Fixed exchange rate 固定汇率。
国际贸易名词解释
International Economics ---- International Trade1. Gravity Model: The value of trade between any two countries is proportional, other things equal, to the product of the two countries’ GDPs, and diminishes with the distance between the two countries.2. Absolute advantage: One country can produced a unit of good with less labor than another country.3. Comparative advantage: A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries.4. Opportunity cost: The opportunity cost of good A in terms of good B is the number of good B that could be produced with the same resources as a given number of good A.5. Production possibility frontier: The maximum amount of good A that can be produced for any given amount of another good B.6. Relative supply curve: On the number of one unit of good A supplied divided by the number of one unit of good B.7. Unit labor requirement: The number of hours of labor required to produce one unit of output.8. The mercantilists: Countries enjoy payment from the rest of the world (like gold and silver).9. The relative price: The relative price of good A is the amount of good B that can be exchanged for one unit of good A.10. Abundant factor: The resource of which a country has a relatively large supply.11. Scarce factor: The resource of which it has a relatively small supply.12. Biased expansion of production possibilities: Which occurs when the production possibility frontier shifts out much more in one direction than in the other.13. Equalization of factor prices: When trade occurs, the relative prices of goods converge, it causes convergence of the relative prices of factors.14. Heckscher-ohlin theory:A country will export that commodity which uses intensively its abundant factor and import that commodity which uses intensively its scarce factor.15. Leontief paradox: Found that U.S. exports were less capital-intensive than U.S. Imports.16. Biased growth: Biased growth takes place when the production possibility frontier shifts out more in one direction than in the other.17. Export-biased growth: Growth that disproportionately expands a country’s production possibilities in the direction of the good it exports.18. Import-biased growth: Growth biased toward the good a country imports.19. Import tariff: Taxes levied on imports.20. Export subsidy: Payments given to domestic producers who sell a good abroad.21. Terms of trade: The price of a country’s exports divided by the price of its imports----on a nation’s welfare.22. Standard trade model: The price of exports relative to imports, a country’s terms of trade, is determined by the intersection of the world relative supply and demand curves.23. Dumping: It is a pricing practice in which a firm charges a lower price for an exported good than it does for the same good sold domestically.24. Reciprocal dumping: Is a situation in which dumping leads to two-way trade in the same product.25. External economies of scale: Shows that the cost per unit depends on the size of the industry but not necessarily on the size of any one firm.26. Internal economies of scale: Shows that the cost per unit depends on the size of an individual firm but not necessarily on that of the industry.27. Infant industry argument: Temporary protection of industries enables them to gain experience.28. Interindustry trade: The exchange of one kind of goods for another kind of goods29. Knowledge spillovers: Knowledge is one of the important input factors in highly innovative industries.30. Labor market pooling: A cluster of firms can create a pooled market for workers with highly specialized skills.31. Monopolistic competition: Monopoly profits rarely go uncontested and attracts competitors.32. Oligopoly: There are several firms, each of which is large enough to affect prices, but none with an uncontested monopoly.33. Direct foreign investment: A firm in one country creates or expands a subsidiary in another.34. Factor movements: Include labor migration, the transfer of capital via international borrowing and lending, and the subtle international linkages involved in the formation of multinational corporations.35. Intertemporal trade: The trade is not of one good for another at a point in time but of goods today for goods in the future. It is also the international borrowing and lending.36. Ad valorem tariff: Are taxes that are levied as a fraction of the value of the imported goods.37. Specific tariff: Are taxes that are levied as a fixed charge for each unit of goods imported.(38. Consumer surplus: Measures the amount a consumer gains from a purchase by the difference between the price he actually pays and the price he would have been willing to pay.)(39. Producer surplus: Measures the amount a producer gains from a sale by the difference between the price he actually receives and the price at which he would have been willing to sell.)40. Optimum tariff: The tariff rate(to) that maximizes national welfare is optimum tariff.。
International Economics chap 04(克鲁格曼国际经济学英文版)
Theory and Policy (Ninth Edition) Paul R. Krugman 黄卫平 彭刚
Chapter 4 A more general one: The standard trade Model
CONTENTS
01 Explain standard trade model
An increase in PC/ PF
RS
1
1
2
2
1
QC
QC
Qc/ QF
QF
Food imports
Relative prices and demand
C Q
Cloth exports
PC×CC+PF×CF=v=PC×QC+PF×QF -budget constraint
The equation above says that production and consumption must lie on the same isovalue line in blue. 1.The economy’s choice of a point of consumption on the isovalue line depends on the tastes of its consumers. 2.Its choice of a point of production depends on the relative price of cloth.
and the relative supply curve; 2. The relationship between relative prices and relative
Export-biased(出口偏向).
3
3. Relative Supply and the Terms of Trade 1) Export-biased（出口偏向） growth(Figure 5-7: a) Suppose that home experiences growth biased toward cloth and disproportionately expands a country’s PP in the direction of the good it exports, Then for the world as a whole the output of cloth relative to food will rise at any given price and the world relative supply curve will shift to the right from RS1 to RS2
10
3) Immiserizing growth （贫困化的经济增长）
A situation where export-biased growth by poor nations can worsen their terms of trade so much that they would be worse off than if they had not grown at all.
14
Case study
Immiserizing growth and the income In the developing countries.
15
据联合国《国际贸易和发展统计手册》 的有关资料，两类产品价格指数变化如下表。 年份 A B 1950年 1960年 1970年 1971年 100 100 91 122 96 144 102 153
克鲁格曼国际经济学答案（英文）
Overview of Section IInternational Trade TheorySection I of the text is comprised of six chapters: Chapter 2 Labor Productivity and Comparative Advantage: The Ricardian Model Chapter 3 Specific Factors and Income Distribution Chapter 4 Resources and Trade: The Heckscher-Ohlin Model Chapter 5 The Standard Trade Model Chapter 6 Economies of Scale, Imperfect Competition, and International Trade Chapter 7 International Factor Movements T Section I Overview Section I of the text presents the theory of international trade. The intent of this section is to explore the motives for and implications of patterns of trade between countries. The presentation proceeds by introducing successively more general models of trade, where the generality is provided by increasing the number of factors used in production, by increasing the mobility of factors of production across sectors of the economy, by introducing more general technologies applied to production, and by examining different types of market structure. Throughout Section I, policy concerns and current issues are used to emphasize the relevance of the theory of international trade for interpreting and understanding our economy. Chapter 2 gives a brief overview of world trade. In particular, it discusses what we know about the quantities and pattern of world trade today. The chapter uses the empirical relationship known as the gravity model as a framework to describe trade. This framework describes trade as a function of the size of the economies involved and their distance. It can then be used to see where countries are trading more or less than expected. The chapter also notes the growth in world trade over the previous decades and uses the previous era of globalization (pre-WWI) as context for today’s experience. Chapter 3 introduces you to international trade theory through a framework known as the Ricardian model of trade. This model addresses the issue of why two countries would want to trade with each other. This model shows how mutually-beneficial trade arises when there are two countries, each with one factor of production which can be applied toward producing each of two goods. Key concepts are introduced, such as the production possibilities frontier, comparative advantage versus absolute advantage, gains from trade, relative prices, and relative wages across countries. 4 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition Chapter 4 introduces what is known as the classic Heckscher-Ohlin model of international trade. Using this framework, you can work through the effects of trade on wages, prices and output. Many important and intuitive results are derived in this chapter including: the Rybczynski Theorem, the Stolper-Samuelson Theorem, and the Factor Price Equalization Theorem. Implications of the Heckscher-Ohlin model for the pattern of trade among countries are discussed, as are the failures of empirical evidence to confirm the predictions of the theory. The chapter also introduces questions of political economy in trade. One important reason for this addition to the model is to consider the effects of trade on income distribution. This approach shows that while nations generally gain from international trade, it is quite possible that specific groups within these nations could be harmed by this trade. This discussion, and related questions about protectionism versus globalization, becomes broader and even more interesting as you work through the models and different assumptions of subsequent chapters. Chapter 5 presents a general model of international trade which admits the models of the previous chapters as special cases. This “standard trade model” is depicted graphically by a general equilibrium trade model as applied to a small open economy. Relative demand and relative supply curves are used to analyze a variety of policy issues, such as the effects of economic growth, the transfer problem, and the effects of trade tariffs and production subsidies. The appendix to the chapter develops offer curve analysis. While an extremely useful tool, the standard model of trade fails to account for some important aspects of international trade. Specifically, while the factor proportions Heckscher-Ohlin theories explain some trade flows between countries, recent research in international economics has placed an increasing emphasis on economies of scale in production and imperfect competition among firms. Chapter 6 presents models of international trade that reflect these developments. The chapter begins by reviewing the concept of monopolistic competition among firms, and then showing the gains from trade which arise in such imperfectly competitive markets. Next, internal and external economies of scale in production and comparative advantage are discussed. The chapter continues with a discussion of the importance of intra-industry trade, dumping, and external economies of production. The subject matter of this chapter is important since it shows how gains from trade arise in ways that are not suggested by the standard, more traditional models of international trade. The subject matter also is enlightening given the increased emphasis on intra-industry trade in industrialized countries. Chapter 7 focuses on international factor mobility. This departs from previous chapters which assumed that the factors of production available for production within a country could not leave a country’s borders. Reasons for and the effects of international factor mobility are discussed in the context of a one-factor (labor) production and trade model. The analysis of the international mobility of labor motivates a further discussion of international mobility of capital. The international mobility of capital takes the form of international borrowing and lending. This facilitates the discussion of inter-temporal production choices and foreign direct investment behavior. 。
国际经济学第6章-标准贸易模型The-Standard-Trade-Model
相关问题
A国和B国有两种生产要素：资本和劳动，用于 生产两种产品X和Y。两国的技术水平一样，X 是资本密集产品，A国是资本充裕的国家。分析 下列情形中，两国贸易条件和福利的变化： a. A国的资本存量增加。 b. A国的劳动供给增加。 c. B国的资本存量增加。 d. B国的劳动供给增加。
三、国际收入转移：RD曲线的移动
麦之勒悖论（The Metzler Paradox）
四、关税和出口补贴:RS和RD曲线同时移动
• 贸易条件的收入分配效应
（2）收入在国家内部的分配 一般情况下，关税对本国的进口产品竞争部门
有利，对出口部门不利；而出口补贴则对进口 产品竞争部门不利，对出口部门有利。
相关问题
假定一个国家对出口产品进行补贴，而另一国 家对这种产品征收高关税来抵消补贴产生的影 响，从而使另一国家的产品相对价格不发生变 化，两国的贸易条件如何变化？两国的福利有 何变化？ 另一方面，假定另一国针锋相对地对自己的出 口产品进行补贴，其结果与上述情况有什么不 同？请对比分析。
对于任何给定的棉布的相对价格，偏向棉布的 经济增长导致棉布的相对供给增加；偏向粮食 的经济增长导致棉布的相对供给减少。
二、经济增长：RS曲线的移动
2、相对供给和贸易条件
假设本国出现了偏向于棉布的经济增长。
二、经济增长：RS曲线的移动
2、相对供给和贸易条件
假设本国出现了偏向于粮食的经济增长。
二、经济增长：RS曲线的移动
• 生产可能性边界和相对供给
一种产品相对价格的上升会导致其相对供给量 的增加。
PC / PF
RS
QC / QF
一、开放经济的标准模型
2、相对价格与相对需求
PC * DC + PF * DF = PC * QC + PF * QF = V
标准贸易模型
? World relative supply and world relative demand世界 相对需求与相对供给之间的关系
? Terms of trade and national welfare贸易条件与国家福利
? Isovalue lines(P94)等价值线
? Lines along which the market value of output is constant同一 条等价值线的产出价值不变
4
Figure 5-1 : Relative Prices Determine the Economy's Output(P91) 产品相对价格确定社会产出
PCQC + PFQF = PCDC + PFDF = V
? The economy's choice of a point on the isovalue line depends on the tastes of its consumers, which can be represented
7
graphically by a series of indifference
3
? Production Possibilities and Relative Supply 生产 可能性和相对供给
? Assumptions of the model:假设
? Each country produces two goods, food (F) and cloth (C)生产 两种产品：棉布和粮食
际收入转移：ＲＤ曲线的移动 ? Tariffs and Export Subsidies: Simultaneous Shifts in RS
krugman_lecture4(new)
♦ K&O(2010),International
Economics: Theory and Policy . Chap5
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
♦
The income effect is represented graphically by shifting the indifference curve.
• The substitution of one good for another when the price of the good changes relative to the other is called the substitution effect.
1.
Differences in labor, labor skills, physical capital, land and technology between countries cause productive differences, leading to gains from trade. These productive differences are represented as differences in production possibility frontiers, which represent the productive capacities of nations. A country’s PPF determines its relative supply curve. National relative supply curves determine world relative supply, which along with world relative demand determines an equilibrium under international trade.
The Standard Trade Model
– Downward sloping – The farther up and to the right each lies, the higher the level of
welfare to which it corresponds – Each gets flatter as we move to the right
• Terms of trade
– The price of the good a country initially exports divided by the price of the good it initially imports.
– A rise in the terms of trade increases a country’s welfare, while a decline in the terms of trade reduces its welfare.
– The world relative supply curve (RS) is upward sloping because an increase in PC/PF leads both countries to produce more cloth and less food.
– The world relative demand curve (RD) is downward sloping because an increase in PC/PF leads both countries to shift their consumption mix away from cloth toward food.
Chapter 5
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Slide 5-13
2 (D) Determining Relative Prices
Suppose that the world economy consists of two countries: • Home (which exports cloth) – Its terms of trade are measured by PC/PF – Its quantities of cloth and food produced are QC and
Slide 5-9
Figure 5-3: Production, Consumption, and Trade in the Standard Model
Food production, QF
Indifference curves D Food imports Q
TT
Cloth exports
Cloth production, QC
3. Economic Growth: A Shift of the RS Curve
Is economic growth in other countries good or bad for our nation? • It may be good for our nation because it means larger markets for our exports. • It may mean increased competition for our exporters. Is growth in a country more or less valuable when that nation is part of a closely integrated world economy? • It should be more valuable when a country can sell some of its increased production to the world market. • It is less valuable when the benefits of growth are passed on to foreigners rather than retained at home.
Slide 5-10
Relative Prices and Demand
If the relative price of cloth, PC/PF , increases, the economy’s consumption choice shifts from D1 to D2. • The move from D1 to D2 reflects two effects: – Income effect – Substitution effect • It is possible that the income effect will be so strong that when PC/PF rises, consumption of both goods actually rises, while the ratio of cloth consumption to food consumption falls.
To determine PC/PF , one must find the intersection of world relative supply of cloth and world relative demand. • The world relative supply curve (RS) is upward sloping because an increase in PC/PF leads both countries to produce more cloth and less food. • The world relative demand curve (RD) is downward sloping because an increase in PC/PF leads both countries to shift their consumption mix away from cloth toward food.
Slide 5-8
Relative Prices and Demand
Indifference curves • Each traces a set of combinations of cloth ( C) and food (F) consumption that leave the individual equally well off • They have three properties: – Downward sloping – The farther up and to the right each lies, the higher the level of welfare to which it corresponds – Each gets flatter as we move to the right
Food production, QF
Q1
VV1(PC/PF)1
Q2
TT
VV2(PC/PF)2 Cloth production, QC
Slide 5-7
2(B) Relative Prices and Demand
The value of an economy's consumption equals the value of its production:
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1. 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.
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2(A) 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: PCQC + PFQF = V
P C Q C F DF = V
The economy’s choice of a point on the isovalue line depends on the tastes of its consumers, which can be represented graphically by a series of indifference curves.
ITR301 Note 7 - 8
The Standard Trade Model
Slide 5-1
Chapter Organization
1. 2. 3. 4. Introduction A Standard Model of a Trading Economy Economic Growth: Shifting the RS Curve International Transfers of Income: Shifting the RD Curve 5. Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD Curve 6. Summary
QF
• Foreign (which exports food) – Its terms of trade are measured by PF/PC – Its quantities of cloth and food produced are Q*C and Q*F
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Determining Relative Prices
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2. A Standard Model of a Trading Economy
The standard trade model is built on four key relationships: A. Production possibility frontier and the relative supply curve B. Relative prices and relative demand C. The welfare effect of changes in the terms of trade D. Determining the relative price
Slide 5-5
Figure 5-1: Relative Prices Determine the Economy’s Output