12 The Standard Trade Model, Part 2

12 The Standard Trade Model, Part 2 - Standard Trade Model,...

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1 1 Standard Trade Model, Part 2 3. Economic Growth a. Economic Growth and the PPF b. Domestic Effects of Economic Growth c. Relative Supply and the Terms of Trade d. International Effects of Economic Growth 4. International Transfers of Income a. Terms of Trade Effects 2 Economic Growth The effects of economic growth in a trading world economy involves 2 questions: 1. Is economic growth in Foreign good or bad for Home and vice versa? 2. Is economic growth in Home more or less valuable when Home is engaged in international trade? 3 Economic Growth and the PPF • Economic growth shifts the PPF outward . – From an increase in the country’s productivity , and/or – From an increase in the country’s resources. • Economic growth is typically biased . 4 Economic Growth and the PPF Q M Q M Q F Q F Q F Q M Q F Q M
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2 5 Domestic Effects of Growth •Th e domestic economic effects of growth are always positive. 6 Domestic Effects of Growth Q F Q M Q M Q F CIC 0 7 Relative Supply, Terms of Trade •Th e international trade effects of economic growth result from the fact that growth typically has a bias . 8 Relative Supply, Terms of Trade • What if Home experiences economic growth
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3 9 Relative Supply, Terms of Trade Q M P M / P F Q F Q M + Q* M Q F + Q* F Q M Q F P M /P F Slope = - P M /P F RS RD 10 Relative Supply, Terms of Trade Slope = - P M /P F Q F Q M Q M Q F CIC 0 11 Relative Supply, Terms of Trade • What if Foreign experiences economic growth strongly biased toward manufactures
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12 The Standard Trade Model, Part 2 - Standard Trade Model,...

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