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1、Chapter 5The Standard Trade Model2021-10-30Slide 5-2Chapter OrganizationIntroductionA Standard Model of a Trading EconomyInternational Transfers of Income: Shifting the RD CurveTariffs and Export Subsidies: Simultaneous Shifts in RS and RDSummaryAppendix: Representing International Equilibrium with
2、Offer Curves2021-10-30Slide 5-3IntroductionPrevious trade theories have emphasized specific sources of comparative advantage which give rise to international trade:Differences in labor productivity (Ricardian model)Differences in resources (specific factors model and Heckscher-Ohlin model)2021-10-30
3、Slide 5-4Those models share s number of features:The productive capacity of an economy can be summarized by its production possibility frontierProduction possibilities determine a countrys relative supply scheduleWorld equilibrium is determined by world relative demand and a world relative supply sc
4、hedule that lies between the national relative supply schedules.The standard trade model is a general model of trade that admits these models as special cases.2021-10-30Slide 5-5A Standard Model of a Trading EconomyThe standard trade model is built on four key relationships:Production possibility fr
5、ontier and the relative supply curveRelative prices and relative demandWorld relative supply and world relative demandTerms of trade and national welfare2021-10-30Slide 5-6A Standard Model of a Trading EconomyProduction Possibilities and Relative SupplyAssumptions of the model: Each country produces
6、 two goods, food (F) and cloth (C) Each countrys production possibility frontier is a smooth curve (TT)The point on its production possibility frontier at which an economy actually produces depends on the price of cloth relative to food, PC/PF.Isovalue lines Lines along which the market value of out
7、put is constant2021-10-30Slide 5-7Figure 5-1: Relative Prices Determine the Economys OutputQIsovalue linesTTA Standard Model of a Trading Economy Cloth production, QCFood production, QF2021-10-30Slide 5-8Figure 5-2: How an Increase in the Relative Price of Cloth Affects Relative SupplyQ1VV1(PC/PF)1Q
8、2VV2(PC/PF)2A Standard Model of a Trading EconomyTT Cloth production, QCFood production, QF2021-10-30Slide 5-9Relative Prices and DemandThe value of an economys consumption equals the value of its production:PCQC + PFQF = PCDC + PFDF = VThe economys choice of a point on the isovalue line depends on
9、the tastes of its consumers, which can be represented graphically by a series of indifference curves.A Standard Model of a Trading Economy2021-10-30Slide 5-10Indifference curves Each traces a set of combinations of cloth (C) and food (F) consumption that leave the individual equally well off They ha
10、ve three properties: Downward sloping The farther up and to the right each lies, the higher the level of welfare to which it corresponds Each gets flatter as we move to the rightA Standard Model of a Trading Economy2021-10-30Slide 5-11TTFigure 5-3: Production, Consumption, and Trade in the Standard
11、Model Cloth production, QCFood production, QFQDIndifference curvesFood importsCloth exportsA Standard Model of a Trading Economy2021-10-30Slide 5-12If the relative price of cloth, PC/PF , increases, the economys consumption choice shifts from D1 to D2. The move from D1 to D2 reflects two effects: In
12、come effect Substitution effect It is possible that the income effect will be so strong that when PC/PF rises, consumption of both goods actually rises, while the ratio of cloth consumption to food consumption falls.A Standard Model of a Trading Economy2021-10-30Slide 5-13TTFigure 5-4: Effects of a
13、Rise in the Relative Price of ClothQ1VV1(PC/PF)1Q2VV2(PC/PF)2D2D1A Standard Model of a Trading Economy Cloth production, QCFood production, QF2021-10-30Slide 5-14The Welfare Effect of Changes in the Terms of TradeTerms of trade The price of the good a country initially exports divided by the price o
14、f the good it initially imports. A rise in the terms of trade increases a countrys welfare, while a decline in the terms of trade reduces its welfare.A Standard Model of a Trading Economy2021-10-30Slide 5-15Determining Relative PricesSuppose that the world economy consists of two countries: Home (wh
15、ich exports cloth) Its terms of trade are measured by PC/PF Its quantities of cloth and food produced are QC and QF Foreign (which exports food) Its terms of trade are measured by PF/PC Its quantities of cloth and food produced are Q*C and Q*FA Standard Model of a Trading Economy2021-10-30Slide 5-16
16、To determine PC/PF , one must find the intersection of world relative supply of cloth and world relative demand. The world relative supply curve (RS) is upward sloping because an increase in PC/PF leads both countries to produce more cloth and less food. The world relative demand curve (RD) is downw
17、ard sloping because an increase in PC/PF leads both countries to shift their consumption mix away from cloth toward food.A Standard Model of a Trading Economy2021-10-30Slide 5-17Figure 5-5: World Relative Supply and DemandRSRDRelative priceof cloth, PC/PFRelative quantityof cloth, QC + Q*C QF + Q*FA
18、 Standard Model of a Trading Economy(PC/PF)112021-10-30Slide 5-18Economic Growth: A Shift of the RS CurveIs economic growth in other countries good or bad for our nation? It may be good for our nation because it means larger markets for our exports. It may mean increased competition for our exporter
19、s.Is growth in a country more or less valuable when that nation is part of a closely integrated world economy? It should be more valuable when a country can sell some of its increased production to the world market. It is less valuable when the benefits of growth are passed on to foreigners rather t
20、han retained at home.A Standard Model of a Trading Economy2021-10-30Slide 5-19Growth and the Production Possibility FrontierEconomic growth implies an outward shift of a countrys production possibility frontier (TT).Biased growth Takes place when TT shifts out more in one direction than in the other
21、 Can occur for two reasons: Technological progress in one sector of the economy Increase in a countrys supply of a factor of productionA Standard Model of a Trading Economy2021-10-30Slide 5-20Figure 5-6: Biased GrowthTT1TT1TT2TT2A Standard Model of a Trading EconomyCloth production, QCFood productio
22、n, QF(a) Growth biased toward clothCloth production, QCFood production, QF(b) Growth biased toward food2021-10-30Slide 5-21Relative Supply and the Terms of TradeExport-biased growth Disproportionately expands a countrys production possibilities in the direction of the good it exports Worsens a growi
23、ng countrys terms of trade, to the benefit of the rest of the worldImport-biased growth Disproportionately expands a countrys production possibilities in the direction of the good it imports Improves a growing countrys terms of trade at the rest of the words expenseA Standard Model of a Trading Econ
24、omy2021-10-30Slide 5-22Figure 5-7: Growth and Relative SupplyRelative priceof cloth, PC/PFRelative quantityof cloth, QC + Q*C QF + Q*FRS1RD1(PC/PF)1RS2(PC/PF)22Relative priceof cloth, PC/PFRelative quantityof cloth, QC + Q*C QF + Q*FRS2RD2(PC/PF)2RS1(PC/PF)11(a) Cloth-biased growth(b) Food-biased gr
25、owthA Standard Model of a Trading Economy2021-10-30Slide 5-23International Effects of GrowthExport-biased growth in the rest of the world improves our terms of trade, while import-biased growth abroad worsens our terms of trade.Export-biased growth in our country worsens our terms of trade, reducing
26、 the direct benefits of growth, while import-biased growth leads to an improvement of our terms of trade.A Standard Model of a Trading Economy2021-10-30Slide 5-24Immiserizing growth A situation where export-biased growth by poor nations can worsen their terms of trade so much that they would be wors
27、e off than if they had not grown at all It can occur under extreme conditions: Strongly export-biased growth must be combined with very steep RS and RD curves. It is regarded by most economists as more a theoretical point than a real-world issue.A Standard Model of a Trading Economy2021-10-30Slide 5
28、-25Table 5-1: Average Annual Percent Changes in Terms of TradeA Standard Model of a Trading Economy2021-10-30Slide 5-26International Transfers of Income: Shifting the RD CurveInternational transfers of income, such as war reparations and foreign aid, may affect a countrys terms of trade by shifting
29、the world relative demand curve.Relative world demand for goods may shift because of:Changes in tastesChanges in technologyInternational transfers of incomeThe Transfer ProblemHow international transfers affect the terms of trade2021-10-30Slide 5-27Effects of a Transfer on the Terms of TradeWhen bot
30、h countries allocate their change in spending in the same proportions (Ohlins point): The RD curve will not shift, and there will be no terms of trade effect.When the two countries do not allocate their change in spending in the same proportions (Keyness point): The RD curve will shift and there wil
31、l be a terms of trade effect. The direction of the effect on terms of trade will depend on the difference in Home and Foreign spending patterns.International Transfers of Income: Shifting the RD Curve2021-10-30Slide 5-28Figure 5-8: Effects of a Transfer on the Terms of TradeRelative priceof cloth, P
32、C/PFRelative quantityof cloth, QC + Q*C QF + Q*FRSRD2RD1(PC/PF)221(PC/PF)1International Transfers of Income: Shifting the RD Curve2021-10-30Slide 5-29Presumptions about the Terms of Trade Effects of TransfersA transfer will worsen the donors terms of trade if the donor has a higher marginal propensi
33、ty to spend on its export good than the recipient.In practice, most countries spend a much higher share of their income on domestically produced goods than foreigners do. This is not necessarily due to differences in taste but rather to barriers to trade, natural and artificial.International Transfe
34、rs of Income: Shifting the RD Curve2021-10-30Slide 5-30Import tariffs and export subsidies affect both relative supply and relative demand.Relative Demand and Supply Effects of a TariffTariffs drive a wedge between the prices at which goods are traded internationally (external prices) and the prices
35、 at which they are traded within a country (internal prices).The terms of trade correspond to external, not internal, prices.Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD2021-10-30Slide 5-31Tariffs and Export Subsidies: Simultaneous Shifts in RS and RDFigure 5-9: Effects of a Tariff
36、 on the Terms of TradeRelative priceof cloth, PC/PFRelative quantityof cloth, QC + Q*C QF + Q*FRS1RD1RD2RS2 (PC/PF)11(PC/PF)222021-10-30Slide 5-32Effects of an Export SubsidyTariffs and export subsidies are often treated as similar policies but they have opposite effects on the terms of trade. Examp
37、le: Suppose that Home offers 20% subsidy on the value of cloth exported: This will raise Homes internal price of cloth relative to food by 20%. This will lead Home producers to produce more cloth and less food. A Home export subsidy worsens Homes terms of trade and improves Foreigns.Tariffs and Expo
38、rt Subsidies: Simultaneous Shifts in RS and RD2021-10-30Slide 5-33Tariffs and Export Subsidies: Simultaneous Shifts in RS and RDFigure 5-10: Effects of a Subsidy on the Terms of TradeRelative priceof cloth, PC/PFRelative quantityof cloth, QC + Q*C QF + Q*FRS1RD1RD2RS2(PC/PF)11(PC/PF)222021-10-30Slid
39、e 5-34Implications of Terms of Trade Effects: Who Gains and Who Loses?The International Distribution of Income If Home (a large country) imposes a tariff, its welfare increases as long as the tariff is not too large, while Foreigns welfare decreases. If Home offers an export subsidy, its welfare det
40、eriorates, while Foreigns welfare increases.The Distribution of Income Within Countries A tariff (subsidy) has the direct effect of raising the internal relative price of the imported (exported) good. Tariffs and export subsidies might have perverse effects on internal prices (Metzler paradox).Tarif
41、fs and Export Subsidies: Simultaneous Shifts in RS and RD2021-10-30Slide 5-35SummaryThe standard trade model provides a framework that can be used to address a wide range of international issues and admits previous trade models as special cases.A countrys terms of trade are determined by the intersection of the world relative supply and demand curves.Economic growth is usual
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