Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Appendix 3.1 The Classical Model with...

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)


TABLE A3.1 Labor Requirements by Industry and Country


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


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


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


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


FIGURE A3.1 Country A’s Trading Equilibrium


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.


FIGURE A3.2 Country A’s Price-Consumption Curve


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


FIGURE A3.3 Derivation of Country A’s Offer Curve


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.


FIGURE A3.4 International Trade Equilibrium

Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Appendix 3.1 The Classical Model with...

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