Chapter 6: The Standard Trade Model
International Borrowing and Lending: The Real Interest Rate ---> For now, we bypass that problem by supposing that loan contracts are specified in ____: When a country borrows, it gets the right to purchase some quantity of consumption at present in return for repayment of some larger quantity in the future
"real" terms
A Standard Model of a Trading Economy: Determining Relative Prices ---> Relative demand for the world also aggregates the demands for cloth and food across the two countries: _____
(Dc + D*c)/(Df + D*f)
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> It results in a decrease in the relative price of cloth from ____ to _____ , a worsening of Home's terms of trade and an improvement in Foreign's terms of trade.
(Pc/Pf)1 to (Pc/Pf)2
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> Clearly, the world relative price of cloth rises from ____ to _____ and thus Home's terms of trade improve at Foreign's expense.
(Pc/Pf)1 to (Pc/Pf)2
A Standard Model of a Trading Economy: Determining Relative Prices ---> The relative supply for the world is then obtained by summing those production levels for both cloth and food and taking the ratio: _____
(Qc + Q*c)/(Qf + Q*f)
A Standard Model of a Trading Economy: International Effects of Growth ---> ____- in the rest of the world is good for us, improving our terms of trade, while ____ abroad worsens our terms of trade
-Export-biased growth -import-biased growth
A Standard Model of a Trading Economy: Determining Relative Prices ---> Let's now suppose that the world economy consists of two countries once again named ___ (which exports cloth) and ____ (which exports food)
-Home -Foreign
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> The slope of an Isovalue line in ____
-Pc/Pf
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> where ____ is the quantity of cloth produced and ____ is the quantity of food produced
-Qc -Qf
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> Our analysis leads to the following general principle: Export-biased growth tends to worsen ____; import-biased growth tends to improve a growing country's terms of trade at ____
-a growing country's terms of trade, to the benefit of the rest of the world; -the rest of the world's expense.
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> The shape of the intertemporal production possibility frontier will differ among countries. Some countries will have production possibilities that are ____, while others are biased toward ____
-biased toward present output -future output
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Home's possibilities are biased toward ____, while Foreign's are biased toward ____
-current consumption -future consumption.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> Tariffs and subsidies drive a wedge between the prices at which goods are traded internationally (____) and the prices at which they are traded within a country (_____)
-external prices -internal prices
A Standard Model of a Trading Economy: International Effects of Growth ---> That is, the growth in the industrial world would be ____, while that in the less-developed world would be ____
-import-biased -export-biased
A Standard Model of a Trading Economy: Relative Prices and Demand ---> These two effects are familiar from basic economic theory. The rise in welfare is an ____; the shift in consumption at any given level of welfare is a ____
-income effect -substitution effect
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Effects of an Export Subsidy ---> suppose that Home offers a 20 percent subsidy on the value of any cloth exported. For any given world prices, this subsidy will raise Home's internal price of cloth relative to that of food by 20 percent. The rise in the relative price of cloth will lead Home producers to _____, while leading Home consumers to ____
-produce more cloth and less food -substitute food for cloth.
A Standard Model of a Trading Economy: International Effects of Growth ---> Most countries tend to experience mild swings in their terms of trade, around ____ percent or less a year, as illustrated in Table 6-1.
1
International Borrowing and Lending: The Real Interest Rate ---> Since the trade-off is one unit of consumption in the present for (1 + r) units in the future, the relative price of future consumption is _____
1/(1 + r)
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> If Home imposes a 20 percent tariff on the value of food imports, for example, the internal price of food relative to cloth faced by Home producers and consumers will be ____ percent higher than the external relative price of food on the world market
20
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> The gains from trade mentioned in Chapters 3, 4, and 5 still apply to this more general approach. The same disclaimers previously discussed also apply: _____ are rarely evenly distributed, leading to both gains and losses for individual consumers.
Aggregate gains
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> _____ takes place when the production possibility frontier shifts out more in one direction than in the other
Biased growth
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The economy's consumption choice therefore also shifts, from ___ to ____
D1 to D2
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> Conversely, if Pc/Pf were to decline, the country would be made worse off; for example, consumption might move back from ___ to ____
D2 to D1
A Standard Model of a Trading Economy: Relative Prices and Demand ---> where ____ and _____ are the consumption of cloth and food, respectively
Dc and Df
A Standard Model of a Trading Economy: Determining Relative Prices ---> The food market is also in equilibrium so that Home's desired imports of food, _____ match up with Foreign's desired food exports, ____
Df - Qf Q*f - D*f
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> ____ means an outward shift of a country's production possibility frontier
Economic growth
A Standard Model of a Trading Economy: International Effects of Growth ---> ____ in our own country worsens our terms of trade, reducing the direct benefits of growth, while _____ leads to an improvement of our terms of trade, a secondary benefit
Export-biased growth import-biased growth
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> The debate revolves around two questions: ____
First, is economic growth in other countries good or bad for our nation? Second, is growth in a country more or less valuable when that nation is part of a closely integrated world economy?
The ______. The multiple factors of production in this model can move across sectors. Differences in resources (the availability of those factors at the country level) drive trade patterns. This model also captures the long-run consequences of trade on the distribution of income.
Heckscher-Ohlin model
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> Growth may be biased for two main reasons: 2. The ____ showed that an increase in a country's supply of a factor of production—say, an increase in the capital stock resulting from saving and investment—will produce biased expansion of production possibilities. The bias will be in the direction of either the good to which the factor is specific or the good whose production is intensive in the factor whose supply has increased. Thus the same considerations that give rise to international trade will also lead to biased growth in a trading economy.
Heckscher-Ohlin model of Chapter 5
International Borrowing and Lending: The Real Interest Rate ---> At the equilibrium real interest rate, ____ will export present consumption in return for imports of future consumption.
Home
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> We will ask in a moment what real differences these biases correspond to, but first let's simply suppose that there are two countries, ___ and ____, with different intertemporal production possibilities
Home and Foreign
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Effects of an Export Subsidy ---> A ____- worsens Home's terms of trade and improves Foreign's.
Home export subsidy
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The effect on ____ is not quite as clear-cut
Home's welfare
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> The extent of this terms of trade effect depends on how large the country imposing the tariff is relative to the rest of the world: ____
If the country is only a small part of the world, it cannot have much effect on world relative supply and demand and therefore cannot have much effect on relative prices.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: ____ (taxes levied on imports)
Import tariffs
A Standard Model of a Trading Economy: International Effects of Growth ---> ____ is not an unlikely possibility, and whenever the rest of the world experiences such growth, it worsens our terms of trade.
Import-biased growth
International Borrowing and Lending: However, we can also abstract from those financial aspects and think of borrowing and lending as just another kind of trade: _____
Instead of trading one good for another at a point in time, we exchange goods today in return for some goods in the future
A Standard Model of a Trading Economy: International Effects of Growth ---> Using this principle, we are now in a position to resolve our questions about the international effects of growth. ____ and ____
Is growth in the rest of the world good or bad for our country? Does the fact that our country is part of a trading world economy increase or decrease the benefits of growth?
A Standard Model of a Trading Economy: International Effects of Growth ---> In a famous paper published in 1958, economist _____ of Columbia University showed that such perverse effects of growth can in fact arise within a rigorously specified economic model.
Jagdish Bhagwati
International Borrowing and Lending: The Real Interest Rate ---> How does a country trade over time?
Like an individual, a country can trade over time by borrowing or lending.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> Are foreign tariffs always bad for a country and foreign export subsidies always beneficial?
Not necessarily. Our model is of a two-country world, where the other country exports the good we import and vice versa. In the real, multination world, a foreign government may subsidize the export of a good that competes with U.S. exports; this foreign subsidy will obviously hurt the U.S. terms of trade.
International Borrowing and Lending: Up to this point, all of the trading relationships we have described were not referenced by a time dimension: _____
One good, say cloth, is exchanged for a different good, say food.
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> When _____ increases, a country that initially exports cloth is made better off, as illustrated by the movement from D1 to D2 in panel (a) of Figure 6-4
Pc/Pf
A Standard Model of a Trading Economy: Determining Relative Prices ---> Home's terms of trade are measured by ____ while Foreign's are measured by ____
Pc/Pf Pf/Pc
A Standard Model of a Trading Economy: Relative Prices and Demand ---> PcQc + PfQf = ______
PcDc + PfDf = V
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> Each of these lines is defined by an equation of the form _____
PcQc + PfQf = V
A Standard Model of a Trading Economy: Relative Prices and Demand ---> Now consider what happens when Pc/Pf increases. Panel (a) in Figure 6-4 shows the effects. First, the economy produces more C and less F, shifting production from ___ to _____
Q1 to Q2
A Standard Model of a Trading Economy: Determining Relative Prices ---> At the equilibrium relative price, Home's desired exports of cloth, _____ match up with Foreign's desired imports of cloth, ____
Qc - Dc D*c - Q*c
A Standard Model of a Trading Economy: Determining Relative Prices ---> At any given relative price Pc/Pf Home will produce quantities of cloth and food Qc and Qf, while Foreign produces quantities Q*c and Q*f where ____
Qc/Qf > Q*c/Q*f
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> When growth is biased toward food, the relative supply curve shifts to the left, as shown by the transition from ____ to ____
RS1 to RS3
The ______. Production possibilities are determined by the allocation of a single resource, labor, between sectors. This model conveys the essential idea of comparative advantage but does not allow us to talk about the distribution of income
Ricardian model
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> Growth may be biased for two main reasons: 1. The _____ shows that technological progress in one sector of the economy will expand the economy's production possibilities more in the direction of that sector's output than in the direction of the other sector's output.
Ricardian model of Chapter 3
When we analyze real problems, we want to base our insights on a mixture of these models. For example, in the last two decades one of the central changes in world trade was the rapid growth in exports from newly industrializing economies. These countries experienced rapid productivity growth; to discuss the implications of this productivity growth, we may want to apply the ____
Ricardian model of Chapter 3
A Standard Model of a Trading Economy: International Effects of Growth ---> However, the conditions under which immiserizing growth can occur are extreme: ____
Strongly export-biased growth must be combined with very steep RS and RD curves, so that the change in the terms of trade is large enough to offset the direct favorable effects of an increase in a country's productive capacity.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> We thus need to qualify our conclusions from a two-country analysis: ____
Subsidies to exports of things the United States imports help us, while tariffs against U.S. exports hurt us.
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> An increase in Pc/Pf would mean a fall in Pc/Pf and the country would be worse off: ____
The relative price of the good it exports (food) would drop
International Borrowing and Lending: Intertemporal Comparative Advantage ---> We have assumed that Home's intertemporal production possibilities are biased toward present production. But what does this mean?
The sources of intertemporal comparative advantage are somewhat different from those that give rise to ordinary trade
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> where ____ is the value of output
V
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> or by rearranging, Of = ____
V/Pf - (Pc/Pf)Qc
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> In Figure 6-2a the highest isovalue line the economy could reach before the change in is shown as ____ ; the highest line after the price change is the point at _____ which the economy produces shifts from Q1 to Q2
VV1 VV2
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> This may, however, seem a little puzzling; --->
What is the relative price of future consumption, and how does one trade over time?
In spite of the differences in their details, our models share a number of features: 3. _____ is determined by world relative demand and a world relative supply schedule that lies between the national relative supply schedules
World equilibrium
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> The general statement, then, is that a rise in the terms of trade increases ____, while a decline in the terms of trade ____
a country's welfare reduces its welfare.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> When analyzing the effects of a tariff or export subsidy, therefore, we want to know how that tariff or subsidy affects relative supply and demand as ____
a function of external prices
International Borrowing and Lending: Intertemporal Comparative Advantage ---> This high real interest rate corresponds to a high return on investment, that is, ____
a high return to diverting resources from current production of consumption goods to production of capital goods, construction, and other activities that enhance the economy's future ability to produce.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> At any given world relative price of cloth, then, Home producers will face _____ and therefore will produce less cloth and more food
a lower relative cloth price
A Standard Model of a Trading Economy: Determining Relative Prices ---> Now that we know how relative supply, relative demand, the terms of trade, and welfare are determined in the standard model, we can use it to understand ____
a number of important issues in international economics.
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> The effects of economic growth in a trading world economy are ____
a perennial source of concern and controversy
A Standard Model of a Trading Economy: International Effects of Growth ---> Most economists now regard the concept of immiserizing growth as more a theoretical point than ____
a real-world issue
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> Although growth is not always as strongly biased as it is in these examples, even growth that is more mildly biased toward cloth will lead, for any given relative price of cloth, to ___
a rise in the output of cloth relative to that of food
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The move from to reflects two effects of the rise in Pc/Pf. Second, the change in relative prices leads to ____, toward food and away from cloth (since cloth is now relatively more expensive).
a shift along the indifference curve
A Standard Model of a Trading Economy: Relative Prices and Demand ---> For our standard model, we assume that the economy's consumption decisions may be represented as if they were based on the tastes of ____
a single representative individual
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> This relative price increase is an improvement in Home's terms of trade, but ___
a worsening of Foreign's
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: An export subsidy gives producers ____
an incentive to export.
International Borrowing and Lending: The Real Interest Rate ---> Those substitution effects are also captured by ____ that relates the relative demand for future consumption
an intertemporal relative demand curve
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> We will see later how to define ____ that maximizes net benefit. (For small countries that cannot have much impact on their terms of trade, the optimum tariff is near zero.)
an optimum tariff
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> However, at ____, the output of food actually falls in panel (a), while the output of cloth actually falls in panel (b).
an unchanged relative price of cloth
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> Equivalently, the internal relative price of cloth on which Home residents base their decisions will ____
be lower than the relative price on the external market
A Standard Model of a Trading Economy: International Effects of Growth ---> In each case the answer depends on the ___-
bias of the growth
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> The international trade effects of growth result from the fact that such growth typically has a ___
bias.
International Borrowing and Lending: The Real Interest Rate ---> Consider what happens when an individual borrows: She is initially able to spend more than her income or, in other words, to consume more than her production. Later, however, she must repay the loan with interest, and therefore in the future she consumes less than she produces. By ____, then, she has in effect traded future consumption for current consumption. The same is true of a borrowing country
borrowing
A Standard Model of a Trading Economy: Relative Prices and Demand ---> An indifference curve traces a set of combinations of _____ that leave the individual equally well off.
cloth (C) and food (F) consumption
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> At the same time, Home consumers will shift their consumption toward ____
cloth and away from food.
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> Now suppose that Pc/Pf were to rise (_____)
cloth becomes more valuable relative to food
International Borrowing and Lending: Intertemporal Comparative Advantage ---> A country that has a _____ in future production of consumption goods is one that in the absence of international borrowing and lending would have a low relative price of future consumption, that is, a high real interest rate.
comparative advantage
A Standard Model of a Trading Economy: Relative Prices and Demand ---> This shifts, from VV1 to VV2 the isovalue line on which ____ must lie.
consumption
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Even in the absence of international capital movements, any economy faces a trade-off between ____ and ____
consumption now and consumption in the future
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Thus there is a tradeoff between ___ and ____
current and future consumption
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> The standard model of trade developed in the last section provides a framework that can ____
cut through these seeming contradictions and clarify the effects of economic growth in a trading world.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The terms of trade improvement benefits Home; however, a tariff also imposes costs by _____ (see Chapter 9).
distorting production and consumption incentives within Home's economy
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> Nevertheless, the subsidy's biggest impact falls on the ____ within the United States. If Europe subsidizes exports of steel to the United States, most U.S. residents gain from cheaper steel. However, steelworkers, the owners of steel company stock, and industrial workers in general may not be so lucky
distribution of income
A Standard Model of a Trading Economy: Relative Prices and Demand ---> As illustrated in Figure 6-3, indifference curves have three properties: 1. They are _____: If an individual is offered less food (F), then to be made equally well off, she must be given more cloth (C)
downward sloping:
A Standard Model of a Trading Economy: Determining Relative Prices ---> The ______ (when Home and Foreign trade) is then given by the intersection of world relative supply and demand at point 1.
equilibrium relative price for the world
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> If Foreign had ____, the effect on the world relative supply curve and thus on the terms of trade would have been similar
experienced growth strongly biased toward cloth
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: _____ (payments given to domestic producers who sell a good abroad)
export subsidies
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The effects of an ____ are quite clear. Foreign's terms of trade improve at Home's expense, leaving it clearly better off. At the same time, Home loses from terms of trade deterioration and from the distorting effects of its policy.
export subsidy
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> Growth that disproportionately expands a country's production possibilities in the direction of the good it exports (cloth in Home, food in Foreign) is ____
export-biased growth
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> This means that the terms of trade correspond to ___, rather than ____
external internal, prices
A Standard Model of a Trading Economy: International Effects of Growth ---> In fact, some studies show that most of the fluctuations in GDP in several developing countries (where GDP fluctuations are quite large relative to the GDP fluctuations in developed countries) can be attributed to ____
fluctuations in their terms of trade.
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> On the other hand, either Home or Foreign growth strongly biased toward ____ will lead to a leftward shift of the RS curve (RS1 to RS3 ) for the world and thus to a rise in the relative price of cloth from (Ps/Pf)1 to (Pc/Pf)3 (as shown in panel (b))
food
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> For the purposes of our standard model, we assume that each country produces two goods, ____ and ____, and that each country's production possibility frontier is a smooth curve like that illustrated by T T in Figure 6-1.1
food (F) and cloth (C)
A Standard Model of a Trading Economy: International Effects of Growth ---> Indeed, as we point out below, it is possible that the United States has suffered some loss of real income because of ____
foreign growth over the postwar period.
A Standard Model of a Trading Economy: International Effects of Growth ---> While growth at home normally raises our own welfare even in a trading world, this is by no means true of ___
growth abroad
A Standard Model of a Trading Economy: Relative Prices and Demand ---> As illustrated in Figure 6-3, indifference curves have three properties: 2. The farther up and to the right an indifference curve lies, the _____: An individual will prefer having more of both goods to less
higher the level of welfare to which it corresponds
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> The higher V is, the farther out an isovalue line lies; thus isovalue lines farther from the origin correspond to ____
higher values of output
A Standard Model of a Trading Economy: Relative Prices and Demand ---> This point is where the isovalue line is tangent to the _____, shown here as point D
highest reachable indifference curve
International Borrowing and Lending: Intertemporal Comparative Advantage ---> So countries that borrow in the international market will be those where ____ are available relative to current productive capacity
highly productive investment opportunities
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> We can find similar ambiguities when we look at the effects of growth at ___
home.
A Standard Model of a Trading Economy: Determining Relative Prices ---> This relative price determines ____
how many units of Home's cloth exports are exchanged for Foreign's food exports.
A Standard Model of a Trading Economy: International Effects of Growth ---> This situation is known to economists as the case of ____
immiserizing growth
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> On the other hand, some models based on ____ point to some potential welfare losses from the European subsidy
imperfect competition and increasing returns to scale in production
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> Similarly, growth biased toward the good a country imports is ____
import-biased growth.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: These government interventions in trade usually take place for ____, ____ or _____.
income distribution, for the promotion of industries thought to be crucial to the economy, or for balance of payments
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The _____ tends to increase consumption of both goods, while the _____ acts to make the economy consume less C and more F
income effect substitution effect
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The graph shows how the ____ induces an increase in the relative production of cloth (move from point 1 to 2) as well as a decrease in the relative consumption of cloth (move from point 1' to point 2')
increase in the relative price of cloth
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> On the other side, growth in other countries may mean ____, who need to compete with foreign exporters.
increased competition for our exporters and domestic producers
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> This growth can result either from ___ or ____
increases in a country's resources or from improvements in the efficiency with which these resources are used.
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The tastes of an individual can be represented graphically by a series of ____
indifference curves.
International Borrowing and Lending: The Real Interest Rate ---> Clearly the price of future consumption in terms of present consumption has something to do with the ____
interest rate.
International Borrowing and Lending: . In this section, we show how the standard model of trade we have developed can also be used to analyze another very important kind of trade between countries that occurs over time: ____ and ____
international borrowing and lending
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Reasoning by analogy, we already know what to expect. In the absence of _____, we would expect the relative price of future consumption to be higher in Home than in Foreign, and thus if we open the possibility of trade over time, we would expect Home to export present consumption and import future consumption
international borrowing and lending
International Borrowing and Lending: Any _____ that occurs over time has a financial aspect, and this aspect is one of the main topics we address in the second half of this book.
international transaction
International Borrowing and Lending: The Real Interest Rate ---> As we will see in the second half of this book, in the real world the ____ is complicated by the possibility of changes in the overall price level.
interpretation of interest rates
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Then there will be a trade-off between present and future production of the consumption good, which we can summarize by drawing an ____
intertemporal production possibility frontier.
International Borrowing and Lending: The Real Interest Rate ---> The ____ for Home and Foreign reflect how Home's production possibilities are biased toward present consumption whereas Foreign's production possibilities are biased toward future consumption
intertemporal relative supply curves
International Borrowing and Lending: This kind of trade is known as _____; we will have much more to say about it later in this text, but for now we will analyze it using a variant of our standard trade model with a time dimension
intertemporal trade;
International Borrowing and Lending: The Real Interest Rate ---> When this relative price of future consumption rises (that is, the real interest rate r falls), a country responds by ____
investing more; this increases the supply of future consumption relative to present consumption (a leftward movement along the intertemporal production possibility frontier in Figure 6-10) and implies an upward-sloping relative supply curve for future consumption
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> We can indicate the market value of output by drawing a number of _____—that is, lines along which the value of output is constant
isovalue lines
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> In assessing the effects of growth in other countries, commonsense arguments can be made on either side. On one side, economic growth in the rest of the world may be good for our economy because ____
it means larger markets for our exports and lower prices for our imports.
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> Suppose now that Home experiences growth strongly biased toward cloth, so that its output of cloth rises at any given relative price of cloth, while ____ declines
its output of food
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> If Home imposes a tariff, it improves ___
its terms of trade at Foreign's expense
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> Note, however, that changes in a country's terms of trade can never decrease the country's welfare below ____
its welfare level in the absence of trade
A Standard Model of a Trading Economy: International Effects of Growth ---> The prices of those goods on world markets are very volatile, leading to ____
large swings in the terms of trade
International Borrowing and Lending: The Real Interest Rate ---> That is, Home will ____
lend to Foreign in the present and receive repayment in the future.
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The equation above says that production and consumption must _____
lie on the same isovalue line.
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> On the other hand, the benefits of growth may be passed on to foreigners in the form of ____
lower prices for the country's exports rather than retained at home.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The standard model tells us that ____ are a good thing for the U.S. economy (which is a net steel importer).
lower steel prices
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> Alternatively, a country may impose a tariff on something the United States also imports, ____
lowering its price and benefiting the United States.
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Economies usually do not consume all of their current output; some of their output takes the form of investment in ____
machines, buildings, and other forms of productive capital.
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> At given market prices, a market economy will choose production levels that _____
maximize the value of its output PcQc + PfQf
A Standard Model of a Trading Economy: International Effects of Growth ---> However, some developing countries' exports are heavily concentrated in ____
mineral and agricultural sectors.
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> The more investment an economy undertakes now, the ____
more it will be able to produce and consume in the future.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The terms of trade gains will outweigh the losses from distortion only as long as the tariff is _____
not too large.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: The result is a shift in the terms of trade, both ____ and the ____
of the country imposing the policy change and of the rest of the world.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The use of export subsidies as a policy tool usually has more to do with the _____
peculiarities of trade politics than with economic logic.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Effects of an Export Subsidy ---> As illustrated in Figure 6-9, the subsidy will increase the world relative supply of cloth and decrease the world relative demand for cloth, shifting equilibrium from ____ to ____
point 1 to point 2
A Standard Model of a Trading Economy: Relative Prices and Demand ---> If the economy cannot trade, then it consumes and produces at ____
point 3
A Standard Model of a Trading Economy: Determining Relative Prices ---> Since there are no differences in ____, the relative demand curve for the world overlaps with the same relative demand curve for each country.
preferences across the two countries,
International Borrowing and Lending: The Real Interest Rate ---> We previously saw how a consumer's preferences for cloth and food could be represented by a relative demand curve relating relative consumption to the relative prices of those goods. Similarly, a consumer will also have ____ that capture the extent to which she is willing to substitute between current and future consumption.
preferences over time
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> Let's imagine an economy that consumes only one good and will exist for only two periods, which we will call ____
present and future.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: The distinctive feature of tariffs and export subsidies is that they create a difference between ____ and ____
prices at which goods are traded on the world market and prices at which those goods can be purchased within a country
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> Thus, as we might expect, a rise in the relative price of cloth leads the economy to ____
produce more cloth and less food.
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> The biases of growth in panels (a) and (b) are strong. In each case the economy is able to ____
produce more of both goods.
A Standard Model of a Trading Economy: Determining Relative Prices ---> We assume that these trade patterns are induced by differences in Home's and Foreign's ____, as represented by the associated relative supply curves in panel (a) of Figure 6.5.
production capabilities
In spite of the differences in their details, our models share a number of features: 1. The productive capacity of an economy can be summarized by its _____, and differences in these frontiers give rise to trade.
production possibility frontier
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Note that this is very different from the effects of a ____, which also lowers domestic prices for the affected goods (since the production subsidy does not discriminate based on the sales destination of the goods).
production subsidy
International Borrowing and Lending: The Real Interest Rate ---> Specifically, the quantity of repayment in the future will be (1 + r) times the quantity borrowed in the present, where ____ is the real interest rate on borrowing.
r
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> Notice that the important consideration here is not which economy grows but ____
rather the bias of that growth.
A Standard Model of a Trading Economy: Relative Prices and Demand ---> If the income effect of the price change were large enough, then consumption levels of both goods could rise (Dc and Df both increase); but the substitution effect of demand dictates that the _____ decrease
relative consumption of cloth, Dc/Df
A Standard Model of a Trading Economy: Determining Relative Prices ---> We also assume that the two countries share the same preferences and hence have the same ____
relative demand curve
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: When countries are big exporters or importers of a good (relative to the size of the world market), the price changes caused by tariffs and subsidies change both ___ and ____
relative supply and relative demand on world markets.
A Standard Model of a Trading Economy: Growth and the Production Possibility Frontier ---> In other words, the country's ____ shifts to the right
relative supply curve
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> This relationship between relative prices and relative production is reflected in the economy's ____ shown in Figure 6-2b.
relative supply curve
In spite of the differences in their details, our models share a number of features: 2. Production possibilities determine a country's ____
relative supply schedule.
International Borrowing and Lending: Intertemporal Production Possibilities and Trade ---> To invest more, however, an economy must ____
release resources by consuming less (unless there are unemployed resources, a possibility we temporarily disregard).
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> If the country were initially an exporter of food instead of cloth, the direction of this effect would be ____
reversed
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> From the point of view of the world as a whole, the relative supply of cloth will fall while the relative demand for cloth will ____
rise
A Standard Model of a Trading Economy: World Relative Supply and the Terms of Trade ---> Then the output of cloth relative to food will _____, and the world relative supply curve will shift to the right, just like the relative supply curve for Home.
rise at any given price for the world as a whole
A Standard Model of a Trading Economy: International Effects of Growth ---> Some analysts even suggested that growth in the poorer nations would actually be ____
selfdefeating.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> This analysis seems to show that export subsidies never make sense. In fact, it is difficult to come up with situations where export subsidies would ____
serve the national interest.
International Borrowing and Lending: The Real Interest Rate ---> In other words, Foreign's relative supply for future consumption is ___
shifted out relative to Home's relative supply.
Because of these common features, the models we have studied may be viewed as ____
special cases of a more general model of a trading world economy
The changing pattern of trade has differential effects on different groups in the United States; to understand the effects of increased trade on the U.S. income distribution, we may want to apply the ____ or the ____ model
specific factors (for the short-run effects) or the Heckscher-Ohlin (for the long-run effects) models of Chapters 4 and 5.
The _____. This model includes multiple factors of production, but some are specific to the sectors in which they are employed. It also captures the short-run consequences of trade on the distribution of income.
specific factors model
We develop a _____, of which the models of Chapters 3 through 5 can be regarded as special cases, and use this model to ask how a variety of changes in underlying parameters affect the world economy.
standard model of a trading world economy
A Standard Model of a Trading Economy: The ____ is built on four key relationships: (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; and (4) the effect of the terms of trade
standard trade model
A Standard Model of a Trading Economy: International Effects of Growth ---> During the 1950s, many economists from poorer countries believed that their nations, which primarily exported raw materials, were likely to experience ____
steadily declining terms of trade over time
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> Then the isovalue lines would be ____
steeper than before
A Standard Model of a Trading Economy: Relative Prices and Demand ---> This change in relative consumption captures the ____ of the price change.
substitution effect
International Borrowing and Lending: Intertemporal Comparative Advantage ---> while countries that lend will be those where _____ are not available domestically
such opportunities
This chapter stresses those insights from international trade theory that are not strongly dependent on the details of the economy's ____
supply side.
A Standard Model of a Trading Economy: International Effects of Growth ---> They believed that growth in the industrial world would be marked by an increasing development of ____, while growth in the poorer nations would take the form of a further extension of their capacity to produce what they were already exporting rather than a move toward industrialization
synthetic substitutes for raw materials
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> Thus ____ hurt the rest of the world
tariffs
A Standard Model of a Trading Economy: The Welfare Effect of Changes in the Terms of Trade ---> We cover all these cases by defining the ____ as the price of the good a country initially exports divided by the price of the good it initially imports.
terms of trade
A Standard Model of a Trading Economy: _____—the price of a country's exports divided by the price of its imports—on a nation's welfare
terms of trade
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Relative Demand and Supply Effects of a Tariff ---> This means that we have to be careful in defining the _____, which are intended to measure the ratio at which countries exchange goods; for example, how many units of food can Home import for each unit of cloth that it exports?
terms of trade
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Import tariffs and export subsidies are not usually put in place to affect a country's ____
terms of trade.
A Standard Model of a Trading Economy: Economic Growth: A Shift of the RS Curve ---> On one hand, growth in an economy's production capacity should be more valuable when ____
that country can sell some of its increased production to the world market
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The move from to reflects two effects of the rise in Pc/Pf. First, the economy has moved to a higher indifference curve, meaning ____
that it is better off.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> Thus when a Commerce Department study determined that European governments were subsidizing exports of steel to the United States, our government demanded ____.
that they raise their prices
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Implications of Terms of Trade Effects: Who Gains and Who Loses? ---> The view that subsidized foreign sales to the United States are good for us is not a popular one. When foreign governments are charged with subsidizing sales in the United States, the popular and political reaction is ____
that this is unfair competition
Previous chapters developed several different models of international trade, each of which makes different assumptions about ____
the determinants of production possibilities.
There are many important issues in international economics whose analysis can be conducted in terms of this general model, with only the details depending on which special model you choose. These issues include ____
the effects of shifts in world supply resulting from economic growth and simultaneous shifts in supply and demand resulting from tariffs and export subsidies.
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> The point on its production possibility frontier at which an economy actually produces depends on _____
the price of cloth relative to food, Pc/Pf
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: It will therefore be more profitable to sell abroad than at home unless the price at home is higher, so such a subsidy raises ____
the prices of exported goods inside a country
A Standard Model of a Trading Economy: Relative Prices and Demand ---> Notice that at this point, the economy exports cloth (______) and imports food.
the quantity of cloth produced exceeds the quantity of cloth consumed
A Standard Model of a Trading Economy: Production Possibilities and Relative Supply ---> The relative supply of cloth will therefore rise when ____
the relative price of cloth rises.
A Standard Model of a Trading Economy: Determining Relative Prices ---> By construction, this relative supply curve for the world must lie in between ____
the relative supply curves for both countries.
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: (since the production subsidy does not discriminate based on _____).
the sales destination of the goods
A Standard Model of a Trading Economy: Relative Prices and Demand ---> The economy's choice of a point on the isovalue line depends on _____
the tastes of its consumers
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Effects of an Export Subsidy ---> Tariffs and export subsidies are often treated as similar policies, since they both seem to support domestic producers, but they have opposite effects on ____
the terms of trade
A Standard Model of a Trading Economy: Relative Prices and Demand ---> As we pointed out in Chapter 5, the value of an economy's consumption equals _____
the value of its production:
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: The direct effect of a tariff is ____
to make imported goods more expensive inside a country than they are outside the country.
A Standard Model of a Trading Economy: International Effects of Growth ---> These swings in turn translate into substantial changes in welfare (because _____).
trade is concentrated in a small number of sectors, and also represents a substantial percentage of GDP
Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD: Whatever the motive for tariffs and subsidies, however, they do have effects on terms of trade that can be understood by ____
using the standard trade model.
A Standard Model of a Trading Economy: Relative Prices and Demand ---> As illustrated in Figure 6-3, indifference curves have three properties: 3. Each indifference curve gets flatter as _____: The more C and the less F an individual consumes, the more valuable a unit of F is at the margin compared with a unit of C, so more C will have to be provided to compensate for any further reduction in F
we move to the right (they are bowed-out to the origin)
International Borrowing and Lending: The Real Interest Rate ---> The parallel with our standard trade model is now complete. If borrowing and lending are allowed, the relative price of future consumption, and thus the world real interest rate, will be determined by the ____
world relative supply and demand for future consumption.
A Standard Model of a Trading Economy: International Effects of Growth ---> They argued that export-biased growth by poor nations would worsen their terms of trade so much that they would be ____
worse off than if they had not grown at all
A Standard Model of a Trading Economy: Relative Prices and Demand ---> As you can see in Figure 6-3, the economy will choose to consume at the point on the isovalue line that ____
yields the highest possible welfare