The Standard Trade Model

The Standard Trade Model
Previous chapters developed several different models of international trade,
each of which makes different assumptions about the determinants of
production possibilities. To bring out important points, each of these
models leaves out aspects of reality that the others stress. These models are:
• The Ricardian model. Production possibilities are determined by the allocation
of a single resource, labor, between sectors. This model conveys the
essential idea of comparative advantage but does not allow us to talk about
the distribution of income.
• The specific factors model. This model includes multiple factors of production,
but some are specific to the sectors in which they are employed. It also
captures the short-run consequences of trade on the distribution of income.
• The Heckscher-Ohlin model. The multiple factors of production in this model
can move across sectors. Differences in resources (the availability of those
factors at the country level) drive trade patterns. This model also captures the
long-run consequences of trade on the distribution of income.
When we analyze real problems, we want to base our insights on a mixture
of these models. For example, in the last two decades one of the central changes
in world trade was the rapid growth in exports from newly industrializing
economies. These countries experienced rapid productivity growth; to discuss
the implications of this productivity growth, we may want to apply the Ricardian
model of Chapter 3. The changing pattern of trade has differential effects on different
groups in the United States; to understand the effects of increased trade
on the U.S. income distribution, we may want to apply the specific factors (for
the short-run effects) or the Heckscher-Ohlin (for the long-run effects) models of
Chapters 4 and 5.
In spite of the differences in their details, our models share a number of features:
1. The productive capacity of an economy can be summarized by its production
possibility frontier, and differences in these frontiers give rise to trade.
2. Production possibilities determine a country’s relative supply schedule.
3. World equilibrium is determined by world relative demand and a world relative
supply schedule that lies between the national relative supply schedules.
112 PART ONE International Trade Theory
Because of these common features, the models we have studied may be
viewed as special cases of a more general model of a trading world economy.
There are many important issues in international economics whose analysis can
be conducted in terms of this general model, with only the details depending on
which special model you choose. These issues include the effects of shifts in
world supply resulting from economic growth and simultaneous shifts in supply
and demand resulting from tariffs and export subsidies.
This chapter stresses those insights from international trade theory that are not
strongly dependent on the details of the economy’s supply side. We develop a
standard model of a trading world economy, of which the models of Chapters 3
through 5 can be regarded as special cases, and use this model to ask how a
variety of changes in underlying parameters affect the world economy.
LEARNING GOALS
After reading this chapter, you will be able to:
• Understand how the components of the standard trade model, production
possibilities frontiers, isovalue lines, and indifference curves fit together to
illustrate how trade patterns are established by a combination of supply-side
and demand-side factors.
• Recognize how changes in the terms of trade and economic growth affect
the welfare of nations engaged in international trade.
• Understand the effects of tariffs and subsidies on trade patterns and the welfare
of trading nations and on the distribution of income within countries.
• Relate international borrowing and lending to the standard trade model,
where goods are exchanged over time.