CHAPTER 3: THE STANDARD

THEORY OF INTERNATIONAL
TRADE
The Production Frontier with
Increasing Costs
Increasing opportunity costs mean that the nation
must give up more and more of one commodity to
release just enough resources to produce each
additional unit of another commodity.
The marginal rate of transformation (MRT) of X for
Y refers to the amount of Y that a nation must give
up to produce each additional unit of X. since the
PPF is concave, it represents increase opportunity
cost as one more down the PPF.
Community Indifference Curves (3.3A)
The Indifference Curve represents all
combinations of market baskets that
provide a consumer with the same level
of satisfaction.
Equilibrium in Isolation (Autarky) and with
Trade
Figure 3.3: Equilibrium in Isolation
Community Indifference Curves (3.3A)
FIGURE 3-2 Communi ty Indi fference Curves for Nati on 1
and Nati on 2.
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FIGURE 3-3 Equilibrium in Isolation.
Equilibrium in Isolation
Revealed (Real World)
Comparative Advantage (3.4B)
Case Study 3-1 shows the revealed
comparative advantage
Gains from Trade with Increasing
Costs (3.5)
Figure 3.4: The Gain from Trade with
Increasing Costs
Differences between Constant Costs and
Increasing Costs
Small-Country Case with Increasing
Costs(3.5D)
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 3-4 The Gains from Trade with Increasing Costs.
Gains from Exchange and from
Specialization
FIGURE 3-5 The Gains from Exchange and from Specialization.
Trade Based on the Differences
in Tastes (3.6A)
FIGURE 3-6 Trade Based on Differences in Tastes.
CHAPTER 4: DEMAND AND
SUPPLY, OFFER CURVES, AND
THE TERMS OF TRADE
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General and Partial Equilibrium
Analysis
There are two ways of analyzing the
Determiantion of Price in International
trade:
General Equilibrium analysis (using PPF
curves to determine the production and
consumption units)
Partial Equilibrium analysis by using the
Demand and Supply curves
We are using relative prices (px / py ) in our
analysis
DEMAND AND SUPPLY, OFFER
CURVES, AND THE TERMS OF
TRADE
The Equilibrium-Relative Commodity Price
with Trade Partial Equilibrium Analysis
Figure 4.1: The Equilibrium-Relative
Commodity Price with Trade with Partial
Equilibrium Analysis
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 4-1 The Equilibrium-Relative Commodity Price with Trade
with Partial Equilibrium Analysis.
The Offer Curve (4.3)
Offer Curve (reciprocal demand curve) shows
how much of its import commodity the nation
demands for it to be willing to supply various
amounts of its export commodity.
The Offer curve shows a nationss willingness
to import and export at different commodity
prices.
The Offer Curve can also be derived from a
Nations PPF, its indifference maps, and the
various hypothetical commodity prices where
trade could take place.
Derivation of Offer Curves
Figures 4.3 & 4.4: Derivation of the Offer
Curves of Nations 1 & 2
The Equilibrium-Relative Commodity Price
with Trade General Equilibrium Analysis
Figure 4.5: Equilibrium-Relative
Commodity Price with Trade
Figure 4.6: Equilibrium-Relative
Commodity Price with Partial Equilibrium
Analysis
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 4-3 Derivation of the Offer Curve of Nation 1.
Derivation of Offer Curves
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 4-4 Derivation of the Offer Curve of Nation 2.
Derivation of Offer Curves
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 4-5 Equilibrium-Relative Commodity Price with Trade.
Equilibrium-Relative Commodity Price with Trade
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 4-6 Equilibrium-Relative Commodity Price with Partial
Equilibrium Analysis.
Equilibrium-Relative Commodity Price with Partial
Equilibrium Analysis
The Terms of Trade (4.6)
In a world with two-nations and two
commodities situation, the Terms of Trade
of a nation is defined as:
The ratio of the price of its export
commodity to the price of its import
commodity the relative trading prices.
(TOT) = Export Price Index / Import Price
Index
Terms of Trade Contd
Generally with many nations and commodities,
the terms of trade of a nation (commodity or net
barter terms of trade) are given by the ratio of
the price index of its exports to the price index of
its imports multiplied by 100 to express it as a
percentage.
Case Study 4-3 Terms of Trade of the G-7
Nations
Case Study4-4 Terms of Trade of Industrial
and Developing Countries for selected years:
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
FIGURE 4-2 Index of Relative U.S. Export Prices (1995 =
100).
Case Study 4-3
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
Table 4.2 TOT of Selected Industrial
Countries
1972 1980 1990 2004
1972-04 %
USA
123 87 98 98 -20%
J apan
95 52 73 89 -4%
Germany
109 89 102 100 -8%
France
95 85 94 102 7%
Italy 110 93 98 103 -6%
Salvatore: International Economics, 8th Edition 2004 J ohn Wiley & Sons, Inc.
Case Study 4-4
TOT of Developing Countries
1972 1980 1990 2005
Developing
Countries
61 105 101 96
Asia 100 98 100 91
Middle
East
137 131 159 125
Western
Hemispher
e
37 181 121 106