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Unformatted text preview: Chapter 04 Extensions and Tests of the Classical Model of Trade CHAPTER 4 EXTENSIONS AND TESTS OF THE CLASSICAL MODEL OF TRADE Learning Objectives: To grasp how wages, productivity, and exchange rates affect comparative advantage and international trade patterns. To understand the implications of extending the basic model of comparative advantage to more than two countries and/or commodities. To make the reader aware that real-world trade patterns are consistent with underlying comparative advantages. I. Outline Introduction- Trade Complexities in the Real World The Classical Model in Money Terms Wage Rate Limits and Exchange Rate Limits Multiple Commodities- The Effect of Wage Rate Changes- The Effect of Exchange Rate Changes Transportation Costs Multiple Countries Evaluating the Classical Model Summary Appendix: The Dornbusch, Fischer, and Samuelson Model II. Special Chapter Features Concept Box 1: Wage Rate Limits and Exchange Rate Limits in the Monetized Ricardian Framework In the Real World: The Size of Transportation Costs In the Real World: Labor Productivity and Import Penetration in the U.S. Steel Industry 4-1 Chapter 04 Extensions and Tests of the Classical Model of Trade III. Purpose of Chapter The purpose of this chapter is to present several extensions of the Classical Ricardian model in order to demonstrate more fully the factors that influence international trade beyond the simple two country-two commodity labor requirement barter model developed in Chapter 3. IV. Teaching Tips A. This chapter begins with a look at the real-world complexities of trade that are omitted from the previous chapters discussion. This should help the students to understand the need to examine the extensions of this chapter. B. The key to using this chapter is to make certain that the student can work with and understand the Classical model in money terms. This provides a framework for demonstrating not only additional microeconomic aspects of international trade but also the important role of the exchange rate. The monetized model incorporating the exchange rate makes the international terms of trade explicit and does not just indicate the limits to the terms of trade. C. It is useful to make students comfortable with the idea that the international (barter) terms of trade are simply the reciprocal of the ratio of international prices expressed in a common currency. This will be of value later when working graphically with the neoclassical model. D. Instructors teaching a one-semester course have indicated that they limited the use of this chapter, in particular the discussion of the DFS model. As a result, the DFS model is in an appendix. We have found, however, that working with the remaining extensions helps students develop some good intuition about the nature of international trade....
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- Spring '08
- Comparative Advantage