class5 Flashcards
Standard trade model
a general model that includes previous Ricardian, Specific Factors, and Heckscher-Ohlin models as special cases.
Caracteristics:
- Countries can have different PPFs because of differences in labor endowments, labor skills, physical capital, land, and technology between countries.
- A country’s PPF determines its relative supply function.
- National relative supply function determine a world relative supply function, which along with world relative demand determines the equilibrium under international trade.
Slope of an isovalue line
- (Pc/Pf)
Effect of increase in Pc relative to f (no trade)
Cloth more valuable relative to food
Qc increase, isovalue line is steeper
Relative supply of cloth to food Qc/Qf increase with the relative price of cloth to food Pc/Pf
Consumption choie
is determined by preferences and the relative price of goods: consume at point where the isovalu line is tangent to the indifferent curve
relative demand for cloth to food decrease as the relative price of cloth to food increases
If economy can’t trade
Consumes at the point where the indifference curve is tangent to the production possibilities frontier
Relative prices and demand
An economy that exports cloth is better off when the price of cloth rises (higher quantity) relative to the price of food
- isovalue line becomes steeper and higher indiferrence curve can be reached
- means that more units of food can be imported for every unit of cloth exported
- increasing welfare
Terms of trade (ToT)
the price of exports relative to the price of imports
= Pexports/Pimports
An increase in the terms of trade increases a country’s welfare
Determining relative prices with trade
We use relative supply and relative demand
Biased growth
Takes place when PPF shifts out more in one direction than in the other.
Can occur for 2 reasons:
1. Technological progress in one sector
2. Increase in a country’s supply of a factor of production
For one sector, quand la partie de PPF augmente, il y a un shift de relative supply curve qui fait augmenter la quantité produit
Biased growth for cloth will lower Pc relative to Pf; lower ToT
Export-biased growth
- Disproportionately expands a country’s production possibilities in the direction of the good it exports
- Worsens a growing country’s ToT to the benefit of the rest of the world
relative growth in the abundant factor leading to an expansion of exports
cause a fall in ToT; fall in welfare of exporting country and rise in welfare of importing country
Import-biased growth
- Disproportionately expands a country’s production possibilities in the direction of the good it imports
- Improves a growing country’s ToT at the rest of the world expense
Immiserizing growth
A situation where export-biased growth by poor nations can worsen their terms of trade so much that they would be worse off than if they had not grown at all.
It can occur under extreme conditions: Stronlgy export-biased growth must be combined with very steep RS and RD curves
relative growth in the scarce factor leading to a reduction of imports
will cause a rise in ToT; increase welfare of country who imports
Supply of natural resources
Inelastic supply
Standard trade model and growth in China
The standard trade model predicts that if growth in China was mainly import-biased (growth in sectors that compete with Canadian or U.S. exports), it would reduce terms of trade for its trading partners.
Export vs Import-biased growth
Export-biased growth
relative growth in the abundant factor leading to an expansion of exports.
will cause a fall in the terms of trade and therefore a fall in welfare of the exporting country, a rise in welfare of the importing country.
Import-biased growth
relative growth in the scarce factor leading to a reduction of imports.
will cause a rise in the terms of trade and therefore a rise in welfare of the importing country, a fall in welfare of the exporting country.
