Date post: | 16-Dec-2015 |
Category: |
Documents |
Upload: | johnathan-watts |
View: | 215 times |
Download: | 0 times |
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Appendix 3.1
The Classical Model with Many Goods
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-2
Assumptions
• Two countries, A and B• Five products, S, T, X, Y, and Z• Fixed labor-output ratios (see Table A3.1)
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-3
TABLE A3.1 Labor Requirements by Industry and Country
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-4
Results
• B is the more technologically advanced country and its greatest comparative advantage good is T
• A’s greatest comparative advantage lies in good Y
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-5
Chain of Comparative Advantage
• By dividing B’s labor hours by A’s labor hours, Table A3.2 shows the chain or rank order of A’s comparative advantage
• The relative wage determines where the chain is divided into groups of goods that country A or B will export
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-6
TABLE A3.2 Ratio of Labor Hours in Country to Labor Hours in Country A by Industry
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Appendix 3.2
Offer Curves and the Terms of Trade
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-8
Country A’s Equilibrium with Trade
• Offer curves or Edgeworth box• Refer to Figure A3.1• A’s pre-trade consumption point is G• A’s post-trade equilibrium point is F, H.e., the tangency between the terms of trade line TOT1 and A’s community indifference curve CIC1
• With trade, A wants to export EH units of good S and import HF units of good T
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-9
FIGURE A3.1 Country A’s Trading Equilibrium
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-10
A’s Price Consumption Curve
• Refer to Figure A3.2• As the terms of trade changes, A’s desired trade levels also change.
• The locus or set of tangency points between A’s CICs and different TOT lines (the curve GFJK) represents A’s price-consumption curve.
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-11
FIGURE A3.2 Country A’s Price-Consumption Curve
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-12
Country A’s Offer Curve
• A’s offer curve is geometrically derived from Figure A3.2
• Country A’s offer curve shows the amount of good S that A is willing to export in return for the imports of good T, given the terms of trade or world price.
• See Figure A3.3
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-13
FIGURE A3.3 Derivation of Country A’s Offer Curve
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.3.1-14
International Trade Equilibrium
• Refer to Figure A3.4 below• A’s offer curve represents A’s desired world trades at different prices or terms of trade; similarly with B’s offer curve.
• International trade equilibrium (in terms of desired trades and equilibrium TOT) occurs at the intersection of the two countries’ offer curves.