Short 4 - E 101: Short Note 4. Standard Trade Model (*...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
1 E 101: Short Note – 4. Standard Trade Model (* Lectures are mainly based on our textbook, Krugman’s International Economics: Theory and Policy. Thorough reading of the text in addition to active participation in classes is strongly recommended. This note is just a short list of topics we discuss in class for your reference.) I. Classic Trade Model 4. Standard Trade Model The standard trade model combines ideas from the Ricardian model and the Heckscher-Ohlin model. 1. Differences in labor, labor skills, physical capital, land and technology between countries cause productive differences, leading to gains from trade. 2. These productive differences are represented as differences in production possibility frontiers, which represent the productive capacities of nations. 3. A country’s PPF determines its relative supply curve. 4. National relative supply curves determine world relative supply, which along with world relative demand determines an equilibrium under international trade.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
* The Gains from Trade (from General Equilibrium perspective) i) The Autarky case PPF U 0 F (Foods) P C /P F C (Clothings) 2
Background image of page 2
ii) The Gains from Free Trade: ( U o Æ U 1 ) PPF U 0 F (Foods) U 1 (P C /P F ) I 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1) Terms of Trade Effects The terms of trade refers to the price of exports relative to the price of imports. When a country exports cloth and the relative price of cloth increases, the terms of trade increase or “improve”. Because a higher price for exports means that the country can afford to buy more imports, an increase in the terms of trade increases a country’s welfare. A decrease in the terms of trade decreases a country’s
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 22

Short 4 - E 101: Short Note 4. Standard Trade Model (*...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online