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Flashcards in Standard Trade Model Deck (56)
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1

What model is the standard trade model?

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

2

How does comparative advantage arise?

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

3

Production optimality condition

Opportunity cost of cloth = relative prices of cloth
I.e. slope of PPF = slope of isovalue line

4

2 conditions for a concave and smooth PPF.

1. > 2 inputs = concave
2. Input substitutability = smooth

5

Relative supply is determined by

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

6

Optimum consumption

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

7

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

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.

8

What is MRScf

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.

9

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

It must lie along the BC
but it does NOT have to lie on PPF since can import and export.

10

What two lines on the allocation graph are the same?

Isovalue line = BC
Both have relative price of cloth as the slope.

11

Production response to higher Pc/Pf due to trade

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

12

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

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.

13

How do we know whether IE or SE stringer?

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

14

How do we determine the SE?

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

15

How does IE affect ICS?

IE = shift of IC = change in welfare

16

Why does utility only consider consumption of the 2 goods?

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

17

TOT =

TOT = Px/Pm

18

What is biased growth?

Growth often occurs in one sector more than another.

19

2 ways to illustrate biased growth

1. Shift out PPF disproportionately in one direction
2. Shift of RS - if growth unbiased, relative supply would be unchanged.

20

Does it matter where the growth takes place?

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

21

impacts of export biased growth

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

22

impacts of import biased growth

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

23

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

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

24

What’s immiserisimg growth?

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

25

How do we show immiserise growth graphically?

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

Under what conditions does immiserise growth happen?

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

27

International income transfers are a ... side phenomenon

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

28

2 economists in the transfer debate problem and their views.

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

29

When does n income transfer NOT shift RD?

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

30

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

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.