International Economics The Standard Trade Model

International Economics THE STANDARD TRADE MODEL The standard trade model is a model that does not rely solely and strongly on the supply side knowledge of an economy. In a distinct way, Specific factor model, the Heckscher-Ohlin model and the Ricardian model, are special cases of the Standard trade model †¢ Two goods: food represented by F and cloth represented by C †¢ Technology: production possibility frontier is bowed-out †¢ Relative price: such that PC/PF †¢ There is efficient level of production: one maximizes the output value given market prices: for example PF QF+ PC QC †¢ The Isovalue line: is the line such the value V as an output is constant: V = PF QF+ PC QC QF = V/ PF – (PC / PF) QC †¢ if we let DC and DF be consumption; then the economy’s consumption value is equal to the value of its production: V = PF QF +PC QC = PF DF + PC DC Efficiency in the level of consumption: the economy’s welfare is maximized by the one on the isovalue line. The economy exports one of the goods, and imports the other when the efficient level of consumption does not coincide with the efficient level of production. Assumptions âž ¢ There is an identical homothetic preference; that is exact aggregation possible. âž ¢ The Country s demands can be found using same indifference curves as â€Å"social ICs† âž ¢ A perfectly competitive market was assumed. 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