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Chapter 6
The Standard Trade Model
◼ Chapter Organization
A Standard Model of a Trading Economy
Production Possibilities and Relative Supply
Relative Prices and Demand
The Welfare Effect of Changes in the Terms of Trade
Determining Relative Prices
Economic Growth: A Shift of the RS Curve
Growth and the Production Possibility Frontier
World Relative Supply and the Terms of Trade
International Effects of Growth
Case Study: Has the Growth of Newly Industrializing Countries Hurt Advanced Nations?
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD
Relative Demand and Supply Effects of a Tariff
Effects of an Export Subsidy
Implications of Terms of Trade Effects: Who Gains and Who Loses?
International Borrowing and Lending
Intertemporal Production Possibilities and Trade
The Real Interest Rate
Intertemporal Comparative Advantage
Summary
APPENDIX TO CHAPTER 6: More on Intertemporal Trade
◼ Chapter Overview
Previous chapters have highlighted specific sources of comparative advantage that give rise to
international trade. This chapter presents a general model that admits previous models as special cases.
This “standard trade model” is the workhorse of international trade theory and can be used to address a wide
range of issues. Some of these issues, such as the welfare and distributional effects of economic growth,
transfers between nations, and tariffs and subsidies on traded goods, are considered in this chapter.
© 2015 Pearson Education, Inc.
5. The terms of trade for Japan, a manufactures (M) exporter and a raw materials (R) importer, is the world
6. The declining price of services relative to manufactured goods shifts the isovalue line clockwise so
