The Standard Trade Model

4 important questions on The Standard Trade Model

Refresh memory: What are the key assumptions of the Ricardian model?

Production possibilities are determined by the allocation of a single resource, labor, between sectors. This model conveys the issential idea of comparative advantage but does not allow distribution of income.

Refresh memory: What are the key assumptions of the Hechscher-Ohlin model?

The multiple factors of production in this model can move across sectors. Differences in resources drive trade patterns. This model also captures the long-run consequences of trade on the distribution of income. 

On which four relationships is the standard trade model built?

1. The relationship between the production possibility frontier and the relative supply curve
2. The relationship between relative prices and relative demand
3. The determination of world equilibrium by world relative supply and world relative demand
4. The effect of the terms of trade (the price of a country's exports divided by the price of its imports) on a nation's welfare.
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At what point on a production possibilities frontier is the production highest?

On the point where the isovalue line is just tangent to the production possibilities curve.

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