ECON 3601 Lecture Notes - Lecture 5: Standard Model, List Of Post-Nominal Letters, Indifference Curve
12 Jun 2018
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Chapter 6 – The Standard Model
• Stadard trade odel is a geeral odel that iludes Riardia, speifi fators, ad
Heckscher-Ohlin models as special cases.
– Two goods, food (F) and cloth (C).
– Each country’s PPF is a smooth curve.
• Differees in labor services, labor skills, physical capital, land, and technology between
countries cause differences in production possibility frontiers.
• A outr’s PPF determines its relative supply function.
• Natioal relatie suppl futios deterie a orld relative supply function, which along
with world relative demand determines the equilibrium under international trade.
Production Possibilities and Relative Supply
• What a outr produes depeds o the relatie prie of loth to food PC /PF.
• A eonomy chooses its production of cloth QC and food QF to maximize the value of its
output V = PCQC + PF QF, given the prices of cloth and food.
– The slope of an isovalue line equals –(PC /PF).
– Produce at point where PPF is tangent to isovalue line.
• Relative prices and relative supply:
– An increase in the price of cloth relative to food PC /PF makes the isovalue line steeper.
– Production shifts from point Q1 to point Q2.
– Supply of cloth relative to food QC /QF rises.
– Relative supply of cloth to food increases with the relative price of cloth to food.
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Relative Prices and Demand
• The alue of the eoo’s consumption must
equal the value of the economy’s production.
PC DC + PF DF = PC QC + PF QF = V
• Assue that the eoo’s consumption decisions may be represented as if they were based
on the tastes of a single representative consumer.
• A idifferee ure represets oiatios of loth ad food that leae the osuer
equally well off (indifferent).
• Idifferee ures
– are downward sloping — if you have less cloth, then you must have more food to be equally
satisfied.
– that lie farther from the origin make consumers more satisfied — they prefer having more of
both goods.
– become flatter when they move to the right — with
more cloth and less food, an extra yard of cloth becomes less valuable in terms of how many
calories of food you are willing to give up for it.
• Cosuptio hoie is ased o preferees ad relatie prie of goods:
– Consume at point D where the isovalue line is
tangent to the indifference curve.
• Eoo eports loth — the quantity of cloth produced exceeds the quantity of cloth
consumed — and imports food.
• Relatie pries ad relatie dead
– An increase in the relative price of cloth PC /PF
causes consumption choice to shift from point D1 to point D2.
– Demand for cloth relative to food DC /DF falls.
– Relative demand for cloth to food falls as the relative price of cloth to food rises.
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• A eoo that eports loth is etter off he the price of cloth rises relative to the
price of food:
– the isovalue line becomes steeper and a higher indifference curve can be reached.
• A higher relatie prie of loth eas that ore alories of food a e iported for eer
yard of cloth exported.
• If the economy cannot trade:
– The relative price of cloth to food is determined by the intersection of relative demand and
relative supply for that country.
– Consume and produce at point D3 where the
indifference curve is tangent to the production
possibilities frontier.
The Welfare Effects of Changes in the
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Document Summary
Chapter 6 the standard model: sta(cid:374)dard trade (cid:373)odel is a ge(cid:374)eral (cid:373)odel that i(cid:374)(cid:272)ludes ri(cid:272)ardia(cid:374), spe(cid:272)ifi(cid:272) fa(cid:272)tors, a(cid:374)d. Two goods, food (f) and cloth (c). The slope of an isovalue line equals (pc /pf). Produce at point where ppf is tangent to isovalue line: relative prices and relative supply: An increase in the price of cloth relative to food pc /pf makes the isovalue line steeper. Production shifts from point q1 to point q2. Supply of cloth relative to food qc /qf rises. Relative supply of cloth to food increases with the relative price of cloth to food. Relative prices and demand: the (cid:448)alue of the e(cid:272)o(cid:374)o(cid:373)(cid:455)"s consumption must equal the value of the economy"s production. Are downward sloping if you have less cloth, then you must have more food to be equally satisfied. That lie farther from the origin make consumers more satisfied they prefer having more of both goods.
