M05_KRUG8276_08_IM_C05

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Chapter 5 The Standard Trade Model Chapter Organization A Standard Model of a Trading Economy Production Possibilities and Relative Supply Relative Prices and Demand The Welfare Effect of Changes in the Terms of Trade Determining Relative Prices Economic Growth: A Shift of the RS Curve Growth and the Production Possibility Frontier Relative Supply and the Terms of Trade International Effects of Growth Case Study: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations? International Transfers of Income: Shifting the RD Curve The Transfer Problem Effects of a Transfer on the Terms of Trade Presumptions about the Terms of Trade Effects of Transfers Case Study: The Transfer Problem and the Asian Crisis Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD Relative Demand and Supply Effects of a Tariff Effects of an Export Subsidy Implications of Terms of Trade Effects: Who Gains and Who Loses? Summary Appendix: Representing International Equilibrium with Offer Curves Deriving a Country’s Offer Curve International Equilibrium
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17 Krugman/Obstfeld • International Economics: Theory and Policy, Eighth Edition Chapter Overview Previous chapters have highlighted specific sources of comparative advantage which give rise to international trade. This chapter presents a general model which 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. The 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 which 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 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.
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