11 The Standard Trade Model, Part 1

11 The Standard Trade Model, Part 1 - The Standard Trade...

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1 1 The Standard Trade Model, Part 1 1. Introduction 2. The Standard Trade Model a. Production Functions, Production Possibilities, and Relative Supply b. Community Indifference Curves and Relative Demand c. Autarky Relative Supply and Demand d. World Relative Supply and Demand e. The Terms of Trade and Economic Welfare 2 Introduction Three different models have been developed: 1. The Ricardian model. 2. The Heckscher-Ohlin model. 3. The Specific Factors model. 3 Introduction • Common features of all three models: First , the productive capacity of the economy can be summarized by its production possibilities frontier and differences in these frontiers give rise to gains from trade. Second , production possibilities determine a country’s relative supply schedule. 4 Introduction • Common features of all three models: Third , community indifference curves determine a country’s relative demand schedule. Fourth , world equilibrium is determined by world relative demand and a world relative supply that lies between the national relative supply schedules.
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2 5 Introduction •Th e Standard Trade Model is a more general model of the world trading economy. – The Ricardian, Heckscher-Ohlin, and Specific Factors models are special cases of this model. 6 The Standard Trade Model Six key relationships: 1. The relationship between a country’s production functions and its production possibilities frontier . 2. The relationship between a country’s production possibilities frontier and its relative supply curve . 7 The Standard Trade Model Six key relationships: 3. The relationship between country’s community indifference curves and its relative demand curve . 4. The determination of world equilibrium price by world relative supply and world relative demand . 8 The Standard Trade Model Six key relationships: 5. The relationship between a country’s relative prices and its terms of trade . 6. The relationship between a country’s terms of trade and its economic welfare
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3 9 The Standard Trade Model • Assumptions: – Two countries: Home and Foreign. – Two goods: Manufactures, M, and Food, F.
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This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at University of California, Berkeley.

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11 The Standard Trade Model, Part 1 - The Standard Trade...

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