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

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

2 Copyright © 2010 Pearson Addison-Wesley. All rights reserved Assumptions Two countries, A and B Five products, S, T, X, Y, and Z Fixed labor-output ratios (see Table A3.1)

3 Copyright © 2010 Pearson Addison-Wesley. All rights reserved TABLE A3.1 Labor Requirements by Industry and Country

4 Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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

5 Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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

6 Copyright © 2010 Pearson Addison-Wesley. All rights reserved TABLE A3.2 Ratio of Labor Hours in Country to Labor Hours in Country A by Industry

7 Copyright © 2010 Pearson Addison-Wesley. All rights reserved. Appendix 3.2 Offer Curves and the Terms of Trade

8 Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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 TOT 1 and A’s community indifference curve CIC 1 With trade, A wants to export EH units of good S and import HF units of good T

9 Copyright © 2010 Pearson Addison-Wesley. All rights reserved FIGURE A3.1 Country A’s Trading Equilibrium

10 Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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.

11 Copyright © 2010 Pearson Addison-Wesley. All rights reserved FIGURE A3.2 Country A’s Price- Consumption Curve

12 Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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

13 Copyright © 2010 Pearson Addison-Wesley. All rights reserved FIGURE A3.3 Derivation of Country A’s Offer Curve

14 Copyright © 2010 Pearson Addison-Wesley. All rights reserved 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.

15 Copyright © 2010 Pearson Addison-Wesley. All rights reserved FIGURE A3.4 International Trade Equilibrium


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