08%20The%20Standard%20Trade%20Model,%20Part%201 - The...

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1 1 The Standard Trade Model, Part 1 • Agenda – The Standard Trade Model – The Terms of Trade – Economic Growth and Trade 2 The Standard Trade Model Assumption Production Functions and PPF’s The Terms of Trade 3 New Assumption There are many factors of production: Labor, L, Capital, K, and Land, T, among others. All factors are fully employed. The supply of each factor in each country is fixed. The are diminishing returns to each factor in each industry in each country. 4 Standard Trade Production Functions The production function for industry i is: Q i = A i * F( L i , K i , T i , … ) –w h e r e A i is productivity in industry i, –L i is labor employed in industry i, –K i is capital employed in industry i, –T i is land employed in industry i, and –F 1 < 1, F 2 < 1, F 3 < 1, …
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2 5 Standard Trade Production Function L C Q C 6 Standard Trade PPF’s Q C Q W 7 The Terms of Trade •Th e terms of trade is: – The price of the good a country initially exports divided by
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This note was uploaded on 02/09/2011 for the course ECON 181 taught by Professor Kasa during the Fall '07 term at University of California, Berkeley.

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08%20The%20Standard%20Trade%20Model,%20Part%201 - The...

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