Economics of International Trade Lecture 2 Chap 3 and 4 (2)

8/11/2019 Economics of International Trade Lecture 2 Chap 3 and 4 (2)

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CHAPTER 3: THE STANDARDTHEORY OF INTERNATIONAL

TRADE


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The Production Frontier withIncreasing Costs

Increasing opportunity costs mean that the nationmust give up more and more of one commodity torelease just enough resources to produce each

additional unit of another commodity .

The marginal rate of transformation (MRT) of X forY refers to the amount of Y that a nation must giveup to produce each addit ional unit of X. since the

PPF is concave, it represents increase opportunitycost as one more down the PPF.


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Community Indifference Curves (3.3A)

The Indifference Curve represents allcombinations of market baskets thatprovide a consumer with the same level

of satisfaction.

Equilibrium in Isolation (Autarky) and withTrade

Figure 3.3: Equilibrium in Isolation


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Community Indifference Curves (3.3A)

FIGURE 3-2 Community Indi fference Curves for Nation 1and Nation 2.


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Salvatore: International Economics, 8th Edition 2004 John Wiley & Sons, Inc.

FIGURE 3-3 Equilibrium in Isolation.

Equilibrium in Isolation


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Revealed (Real World)Comparative Advantage (3.4B)

Case Study 3-1 shows the revealedcomparative advantage


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Gains from Trade with IncreasingCosts (3.5)

Figure 3.4: The Gain from Trade withIncreasing Costs

Differences between Constant Costs andIncreasing Costs

Small-Country Case with IncreasingCosts(3.5D)


8/25Salvatore: International Economics, 8th Edition 2004 John Wiley & Sons, Inc.

FIGURE 3-4 The Gains from Trade with Increasing Costs.


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Gains from Exchange and fromSpecialization

FIGURE 3-5 The Gains from Exchange and from Specialization.


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Trade Based on the Differencesin Tastes (3.6A)

FIGURE 3-6Trade Based on Differences in Tastes.


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CHAPTER 4: DEMAND ANDSUPPLY, OFFER CURVES, AND

THE TERMS OF TRADE


12/25Salvatore: International Economics, 8th Edition 2004 John Wiley & Sons, Inc.

General and Partial Equilibrium AnalysisThere are two ways of analyzing the

Determiantion of Price in Internationaltrade:

General Equilibrium analysis (using PPFcurves to determine the production andconsumption units)

Partial Equilibrium analysis by using theDemand and Supply curves We are using relative prices (p x / p y ) in our

analysis


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DEMAND AND SUPPLY, OFFERCURVES, 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 PartialEquilibrium Analysis


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FIGURE 4-1 The Equilibrium-Relative Commodity Price with Tradewith Partial Equilibrium Analysis.


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The Offer Curve (4.3)

Offer Curve (reciprocal demand curve) showshow much of its import commodity the nationdemands for it to be willing to supply variousamounts of its export commodity.

The Offer curve shows a nationss willingnessto import and export at different commodityprices.

The Offer Curve can also be derived from aNations PPF, its indifference maps, and thevarious hypothetical commodity prices wheretrade could take place.


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Derivation of Offer Curves

Figures 4.3 & 4.4: Derivation of the OfferCurves of Nations 1 & 2

The Equilibrium-Relative Commodity Pricewith Trade General Equilibrium Analysis

Figure 4.5: Equilibrium-RelativeCommodity Price with Trade

Figure 4.6: Equilibrium-RelativeCommodity Price with Partial Equilibrium Analysis


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FIGURE 4-3 Derivation of the Offer Curve of Nation 1.



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FIGURE 4-4 Derivation of the Offer Curve of Nation 2.



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FIGURE 4-5 Equilibrium-Relative Commodity Price with Trade.

Equilibrium-Relative Commodity Price with Trade


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FIGURE 4-6 Equilibrium-Relative Commodity Price with Partial

Equilibrium Analysis.

Equilibrium-Relative Commodity Price with PartialEquilibrium Analysis


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The Terms of Trade (4.6)

In a world with two-nations and twocommodities situation, the Terms of Tradeof a nation is defined as:

The ratio of the price of its exportcommodity to the price of its importcommodity the relative trading prices.

(TOT) = Export Price Index / Import PriceIndex


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Terms of Trade Contd

Generally with many nations and commodities,the terms of trade of a nation (commodity or netbarter terms of trade) are given by the ratio ofthe price index of its exports to the price index ofits imports multiplied by 100 to express it as apercentage.

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:


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FIGURE 4-2 Index of Relative U.S. Export Prices (1995 =100).

Case St udy 4-3


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Table 4.2 TOT of Selected IndustrialCountries

1972 1980 1990 2004 1972-04 %

USA 123 87 98 98 -20%

Japan95 52 73 89 -4%

Germany 109 89 102 100 -8%

France 95 85 94 102 7%

Italy 110 93 98 103 -6%


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Salvatore: InternationalEconomics 8thEdition 2004 John Wiley& Sons Inc

Case Study 4-4TOT of Developing Countries

1972 1980 1990 2005

DevelopingCountries

61 105 101 96

Asia 100 98 100 91

MiddleEast

137 131 159 125

WesternHemispher

e

37 181 121 106

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Economics of International Trade Lecture 2 Chap 3 and 4 (2)