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EC336 - TRADE > Standard Trade Model > Flashcards

Standard Trade Model Flashcards

1
Q

What model is the standard trade model?

A

A generalised neoclassical model of trade, where Ricardian and HO models are special cases of it.

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2
Q

How does comparative advantage arise?

A

Through “productive differences” between countries - doesn’t specify exactly what.

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3
Q

Production optimality condition

A

Opportunity cost of cloth = relative prices of cloth

I.e. slope of PPF = slope of isovalue line

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4
Q

2 conditions for a concave and smooth PPF.

A
  1. > 2 inputs = concave

2. Input substitutability = smooth

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5
Q

Relative supply is determined by

A

PPF - productive differences —> different PPF —> determines RS

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6
Q

Optimum consumption

A

Max utility s.t BC (value of consumption = value of production)
Slope of IC = slope of BC
MRS of cloth for food = relative price of cloth

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7
Q

What do we assume about ICs? What does this imply?

A

Assume IC is for a representative consumer

  • Means effects of a change in income distribution on demand are negligible
  • assume labour and land workers react to price changes in the same way.
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8
Q

What is MRScf

A

MRScf = MRS of cloth for food = MUc/MUf

- how much food the consumer is willing to give up for an additional unit of cloth, keeping utility constant.

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9
Q

When must consumption lie for an open economy on the graph?

A

It must lie along the BC

but it does NOT have to lie on PPF since can import and export.

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10
Q

What two lines on the allocation graph are the same?

A

Isovalue line = BC

Both have relative price of cloth as the slope.

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11
Q

Production response to higher Pc/Pf due to trade

A

Higher Pc/Pf = steeper isovalue line
Tangent to PPF more south east now
Qc rises, Qf falls

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12
Q

Consumption side response to rising Pc/Pf du to trade (2 effects)

A

IE: assume both goods normal. Higher Pc/Pf = higher export income = can consume more imports too. Dc and Df rise.

SE: Pc relative more expensive so Dc falls and Df rises.

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13
Q

How do we know whether IE or SE stringer?

A

If PC/PF rises:
IE > SE if Qc rises overall
SE>IE if Qc falls overall

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14
Q

How do we determine the SE?

A

Draw a hypothetical BL with the NEW slope and tangent to OLD IC.
- movement along IC = SE

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15
Q

How does IE affect ICS?

A

IE = shift of IC = change in welfare

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16
Q

Why does utility only consider consumption of the 2 goods?

A

Because we assume full employment, so when prediction changes we do NOT need to consider labour-leisure effects.

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17
Q

TOT =

A

TOT = Px/Pm

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18
Q

What is biased growth?

A

Growth often occurs in one sector more than another.

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19
Q

2 ways to illustrate biased growth

A
  1. Shift out PPF disproportionately in one direction

2. Shift of RS - if growth unbiased, relative supply would be unchanged.

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20
Q

Does it matter where the growth takes place?

A

NO - what matters is what direction the growth is biased in, not where is takes place.

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21
Q

impacts of export biased growth

A

Export biased growth —> higher RS of export good = worse TOT = lower welfare
(Effects opposite for foreign)

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22
Q

impacts of import biased growth

A

Import biased growth = lower RS of export good = improved TOT = higher welfare

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23
Q

Does the empirical evidence support the TOT predictions from growth in China in high tech goods?

A

High tech goods = import biased growth for China = TOT rises
Export biased growth for west = TOT worsens
- But the data shows the opposite!

24
Q

What’s immiserisimg growth?

A

Growth in poorer countries could be self defeating if its export biased. TOT worsens.

25
Q

How do we show immiserise growth graphically?

A

PPF shifts our disproportionate towards export good.
Isovalue line flatter as Pc/Pf rises.
Show isovalue lines crossing, so that new consumption point to south west of old —> lower IC.

26
Q

Under what conditions does immiserise growth happen?

A

Need RD V INELASTIC - so that shift in RS has large effect on TOT.

27
Q

International income transfers are a … side phenomenon

A

DEMAND SIDE - transfer purchasing power, which can shift RD.

28
Q

2 economists in the transfer debate problem and their views.

A

Debate about burden of Germany war reparations.
Keynes: nominal sums < true burden as TOT worsened.
Ohlin: no TOT worsening

29
Q

When does n income transfer NOT shift RD?

A

If the 2 countries have the SAME MARGINAL PROPENSITY TO SPEND ON THE GOODS.

30
Q

Why did Keynes believe that RD did shift after German war reparations?

A

He argued Germany had a higher MPS on its export good, so transfer of money to allies —> RD of export good falls = TOT worsens for Germany.

31
Q

Under what condition would TOT effects soften the blow to the donor of an income transfer?

A

If the donor has a higher MPS on it’d import good, transferring money —> higher RD for its export good —> TOT improves.

32
Q

What’s the paradoxical possibility with development aid?

A

That recipients if aid could be made worse off.
If the recipients of aid have a higher MPS on their import good relative to the donor, RD for their export good falls = TOT worsens.

33
Q

Empirical evidence on whether MPS tends to be higher for own exports or imports.

A

US spends 85% national income on domestic goods, 15% on imports.
So MPS tends to be higher on own exports.
Meaning donating money —> worse TOT.

34
Q

Import tariff =

A

Tax levied on imports

35
Q

Export subsidy =

A

Payments given to domestic exporters

36
Q

2 types of prices trade policies creates wedge between

A

Domestic / internal prices
Vs
World / external prices.

37
Q

TOT depends on what type of price! Why?

A

WORLD/ external prices determine TOT - since exports and imports are traded on world markets.

38
Q

Production response to impor twriff

A

Import tariff = internal Pc/Pf falls
Flatter isovalue line = optimum production lower Qc higher Qf
RS of cloth falls

39
Q

Consumption response to import tariff

A

Internal Pc/Pf falls
SE: Dc rises, Df falls
RD for cloth shifts up

40
Q

Why no IE in consumption response to trade policies?

A

Trade policies affect INTERNAL prices, not external, so export or import income unaffected.

41
Q

Overall effect of import tariff for economy

A

Lower RS, higher RD = higher WORLD Pc/Pf = TOT improves!

42
Q

Summarise effects on internal and external prices of import tariff

A

Internal Pc/Pf falls due to import tariff raising food prices
External Pc/Pf rises due to RS falling and RD rising in response

43
Q

Why might a tariff not be great for welfare despite TOT improvement?

A

Because it creates distortions in the domestic market - TOT isn’t the only thing that matters for welfare. Or could lead to retaliation.

44
Q

The ability of a country’s trad policies to affect world RS & RD depend on…

A

Relative size of home vs foreign economies or industries
- if home a large part of world economy, its domestic production and consumption responses are able to influence world RD and RS

45
Q

How does an export subsidy affect internal price?

A

Internal Pc/Pf rises

46
Q

Domestic production response to export subsidy

A

Internal Pc/Pf rises = steeper isovalue line = tangent @ higher Qc, lower Qf = RS of cloth shifts right

47
Q

Domestic consumption response to export subsidy

A

Internal Pc/Pf rises

SE: Dc falls, Df rises = RD shifts down.

48
Q

Overall effect of export subsidy on TOT

A

RS rises, RD falls —> external Pc/Pf falls = TOT worsens for the country that imposed the export subsidy.

49
Q

Summarise internal and external price effects of export subsidy

A

Internal Pc/Pf rises due to export subsidy

External Pc/Pf falls as RS rises and RD falls in response.

50
Q

2 negative effects of export subsidy

A
  1. Worse TOT

2. Monetary cost + distortions —> DWL

51
Q

In a 2 country 2 good model, trade can be seen as a … … …

A

ZERO SUM GAME

e.g home imposing an import tariff improves their own TOT, meaning foreign TOT worsens.

52
Q

Give an example of why trade is not necessarily a zero sum game when we have >2 countries >2 goods.

A

If US imposed import tariff on clothing —> US TOT improves
But if UK also imports clothing, then it benefits from the higher TOT too without having any of the distortions from the tariff.

53
Q

Explain the impacts on TOT. Export subsidies by foreign counties om goods that the UK…

A

1) exports = worse TOT

2) imports = improved TOT

54
Q

Explain the impacts on TOT. Import tariffs by foreign countries on goods that the UK…

A

1) exports = worse TOT

2) imports = improved TOT

55
Q

How does export subsidy impact income distribution domestically?

A

Domestic exporter gain

Resources shift away from import competing sector

56
Q

How does import tariff impact income distribution domestically?

A

Domestic import competing sector gains: consumers substitute away from now more expensive imports to domestic products.
Resources shift away from export sector.

EC336 - TRADE (9 decks)

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