The Standard Trade Model Ø Questions Why are 48 countries producing and/or exporting cars? Ø Assumptions 2 -nation 2 -commodity 2 -factor model with increasing costs * Why increasing Opportunity Costs? 1) All units of the same factor are not identical. 2) Factors are not used in the same fixed proportion. -> 2 nations have different factor endowments (resources) and/or use different technologies in production -> Different PPFs
The Standard Trade Model Ø Equilibrium A) Equilibrium in Autarky (self-sufficiency) The country produces and consumes the point where (a) IC, (b) relative price line, and (c) PPF meet. * producers’ optimum point = consumers’ optimum point B) Equilibrium with Trade 1) The country produces the point where the international price line is tangent to PPF, 2) trade with each other, and * trade triangle : shows the amounts of imports and exports. 3) consumes at the point where the international price line is tangent to a new IC. -> Incomplete Specialization * producers’ optimum point ≠ consumers’ optimum point
The Standard Trade Model Ø 4 Cases of Producers’ Production & Consumption A) Different PPFs (Tech or Resources) & Diff Tastes → Discussed (Trade is possible and mutually beneficial. ) B) Diff PPFs & Same Tastes → Trade is possible and mutually beneficial. C) Same PPFs & Diff Tastes → Trade is possible and mutually beneficial. D) Same PPFs & Same Tastes → Trade doesn’t happen.
Offer Curve Ø Definition An Offer Curve shows the quantity of one type of product that an agent will export ("offer") for each quantity of another type of product that it imports. Ø Use At the intersection of two offer curves, there is no surplus or shortage of the two goods. → International equilibrium price and equilibrium quantity (imports and exports) * At other prices, there is surplus or shortage (not an equilibrium)