Standard model of trade Flashcards
What are the assumptions of the standard model of trade?
- 2 Countries and 2 goods
- Full factor utilization
- Perfect competition
- Diminishing returns to factor utilization
What does full factor utilization entail?
It entails that the economy is operating on the PPF curve.
What does an isovalue show?
It shows the value of production given a certain quantity produced.
How does an economy choose how much to produce?
It maximises the value of its production, which is at the point where ppf meets isovalue lines that is the furthest to the right.
What is an indifference curve?
It is a combinations of goods that yield the same utility level.
What are the properties of indifference curves?
- Indifference curves are downward sloping.
- The curves up and to the right yield higher utility.
- The curves get flatter as they move to the right.
If Pc/Pf increses, then…?
- Economy produces more C and less F.
- Economy increases consumption of F more than C. That has a positive income effect, since C is more expensive tham F and substitution effect.
What is terms of trade?
It is the world market price of a good a country exports divided by the world market price of the good the country imports.
What are term-of-trade effects?
It is effects ina an economy that happen because its terms of trade have changed.
What happens if the country’s terms of trade increases?
It affects welfare in a positive way.
What happens if the terms of trade deteriorates?
Welfare decreases, but not below its autarkic levels.
What is biased growth?
It is an expansion of PPF, but no equally for both goods, due to sector specififc technological knowledge and increased supply of factor intensive in an industry.
How does biased growth affect terms of trade?
Export biased growth affects it negatively and inport biased growth affects it positivelly.
What is an SS curve?
Relationship between relative prices of goods and relative prices of factors.
