THE STANDARD THEORY OF INTERNATIONAL TRADE

1

• THE STANDARD THEORY OFINTERNATIONAL TRADE

2
Community indifference curves (IC)

• Tastes can be shown graphically with indifference
  curves, which is various combinations of two
  goods that give a consumer the same total level
  of satisfaction.

3
Assumptions

• Completeness
• Transitivity
• Rational Choice
• Non-saturation
• Continuity
• Strict Convexity
• Smooth Indifference Curves

4
(No Transcript)
5
Properties of the IC

• Downward sloping indifference curves
• Keeping satisfaction constant means giving up
  some of one good for more of another
• Higher ICs (those farther from the origin)
  represent greater levels of satisfaction
• Non-intersecting ICs
• Convex ICs
• As more of one good is received, consumers are
  less willing to give up what is left of the other

6
Marginal Rate of Substitution (MRS)

• MRS of X for Y is the amount of Y that a nation
  could give up for one extra unit of X still
  remain on the same IC.
• The MRS at a point on the IC is the slope of the
  IC at that point.

7
(No Transcript)
8
MRS gt PW/PC
9
Characteristics of autarky equilibrium

• Production point Production point with maximum
  GDP
• Consumption point MRS price ratio

10
PPC
11
Gains from Trade

• Consumption gain
• Production gain

12
PPC
13
Increasing Opportunity Costs

• Production costs increase as more of a commodity
  is produced.

14
Increasing Opportunity Costs When

• Resources are not homogeneous
• Factors are not used in fixed proportion

15
(No Transcript)
16
C
B
tt
17
(No Transcript)
18
Specialization

• Increasing opportunity costs lead to incomplete
  specialization

19
B
tt
20
(No Transcript)
21
(No Transcript)
22
Institute of International Economics

• A private research institution devoted to study
  international economic issues. Information
  relevant to international equilibrium can be
  found in http//www.iie.com