STANDARD TRADE MODEL
Use the relative demand-supply framework from the module for the following:
1: (10 points) Trade: Suppose Home and Foreign have identical demand but Home is capital abundant relative to foreign but they use the same technology (eg like the H-O model we saw).
a)
Explain why the excess supply will differ across countries.
b)
Depict this in the ‘standard model of trade’ as per the module. EG within relative demand and the relative supply framework
c)
Compare autarchy prices, production and consumption in each country.
d)
What happens to prices production and consumption in each country when we open to free trade?
e)
Do we get Gains from Trade? Explain. Give the intuition.
2: (10 points) Trade: Suppose Home and Foreign have identical endowments and technologies (so have the same PPF) but Home has demand biased towards Manufacturing.
a)
Explain why/how the excess demand will differ across countries.
b)
Depict this in the ‘standard model of trade’ as per the module.
c)
Compare prices, production and consumption in each country in autarchy?
d)
What happens to prices production and consumption in each country when we open to free trade?
e)
Do we get Gains from Trade? Explain. Give the intuition.
3: (10 points) Import Tariffs and Export Subsidies: Suppose Home and Foreign have identical demand but Home is capital abundant (as in Q1 above).
a)
Depict free trade equilibrium in the ‘standard model of trade’ as per the module.
b)
Now suppose Home imposes an import tariff (this is a tax placed on foreign goods as they are shipped into the country). What is the effect on Home’s TOT and what are the effects of the tariff on Home production and consumption in equilibrium? Show in a diagram and explain.
c)
Now suppose Home instead imposes an export subsidy (this is a subsidy placed on domestic goods as they are shipped out of the country). What is the effect on Home’s TOT and what are the effects of the tariff in Home? Show in a diagram and explain.
d)
Compare the impact of the two types of policies. Are they similar, dissimilar?
#STANDARD #TRADE #MODEL #Depict #standard #model #trade
