The-Standard-Trade-Model.pptx

Economy

1. Topic: THE STANDARD TRADE MODEL Date presented: MARCH 30, 2022 Presenters: Nelson, Rovanhel E. (The Standard Trade Model of a Trading Economy) Quilang, Christian S. (Tariffs and Export Subsidies ; International Borrowing and Lending)

2. 5.1. A Standard Model of A Trading Economy 5.2. Tariffs and Exports Subsidies 5.3. International Borrowing and Lending The Standard Trade Model

3. • Understand how the components of the standard trade model, production possibilities frontiers, isovalue lines, and indifference curves fit together to illustrate how trade patterns are established by a combination of supply-side and demand-side factors. • Recognize how changes in the terms of trade and economic growth affect the welfare of nations engaged in international trade. • Understand the effects of tariffs and subsidies on trade patterns and the welfare of trading nations and on the distribution of income within countries. • Relate international borrowing and lending to the standard trade model, where goods are exchanged over time. Learning Objectives

4. The Ricardian model. 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. The specific factors model. 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. The Heckscher-Ohlin model. 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. The Standard Model of a Trading Economy

5. Four Key Relationships: (1) the relationship between the production possibilities frontier and the relative supply; (2) the relationship between relative prices and relative demand; (3) the equilibrium of relative supply and relative demand; and (4) the effect of the terms of trade The Standard Model of a Trading Economy

6. The Standard Model of a Trading Economy The PPF provides an explanation of why the supply curve has a positive slope. As the quantity of chicken produced increases, the opportunity cost of producing chicken also increases. Production Possibilities Frontier and Relative Supply

7. The Standard Model of a Trading Economy Relative Prices and Relative Demand What is a relative price? A relative price is a price of a product or service compared to another.  It’s expressed as a ratio between the prices of two products or services.

8. The Standard Model of a Trading Economy Relative Prices and Relative Demand Why is a relative price important? The increasing relative price encourages consumers to save money on expensive products and search for their substitutes, while companies try to bring more products to the market to gain profit. Law of Demand The law of demand states that if all other factors remain equal, the higher the price of a good, the fewer people will demand that good. In other words, the higher the price, the lower the quantity demanded. 

9. The Standard Model of a Trading Economy Relative Prices and Relative Demand What is the relationship of the relative price and the relative demand? Movements in relative price inform about the scarcity of specific products or services. If a relative price increases, it shows that demand exceeds supply (or that supply lags behind demand), whereas if a relative price decreases, it indicates the opposite.

10. The Standard Model of a Trading Economy Equilibrium on Supply and Demand What is Equilibrium? Equilibrium is the state in which market supply and demand balance each other, and as a result prices become stable. The equilibrium price is where the supply of goods matches demand.

11. The Standard Model of a Trading Economy Effects of the Terms of Trade What Are Terms of Trade? Terms of trade (TOT) is a key economic metric of a company's health measured through what it imports and exports. Terms of Trade is the price of a country’s exports divided by the price of its imports on a nation’s welfare.

12. The Standard Model of a Trading Economy Effects of the Terms of Trade Factors Affecting Terms of Trade scarcity size and quality of goods reciprocal demand changes in factor endowments changes in technology taste of consumers in a country economic growth tariff devaluation

13. Tariffs and Export Subsidies

14. Tariffs and Export Subsidies What is Tariff? A tariff is an import tax on goods coming into the country. Tariffs are paid to the customs authority of the country imposing the tariff.

15. Tariffs and Export Subsidies Why Tariff? - Protecting Domestic Employment - Protecting Consumers - Infant Industries - National Security - Retaliation

16. Tariffs and Export Subsidies Common Types of Tariffs? - Specific tariffs - Ad valorem tariffs Non-Tariff Barriers to Trade - Licenses - Import quotas - Voluntary export restraints - Local content requirements

17. Tariffs and Export Subsidies Who Benefits from Tariffs? The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated. Unfortunately for consumers—both individual consumers and businesses—higher import prices mean higher prices for goods.

18. Tariffs and Export Subsidies What is Export Subsidy? Export incentives are regulatory, legal, monetary, or tax programs that are designed to encourage businesses to export certain types of goods or services. Export incentives are a form of economic assistance that governments provide to firms or industries within the national economy, in order to help them secure foreign markets. A government providing export incentives often does so in order to keep domestic products competitive in the global market.

19. Tariffs and Export Subsidies Types of Export Incentives - export subsidies - direct payments - low-cost loans - tax exemption on profits made from exports and - government-financed international advertising

20. Tariffs and Export Subsidies What is Export Subsidy? Export subsidies can cause inflation : the government subsidies the industry based on costs, but an increase in the subsidy is directly spent on wage hikes demanded by employees. Now the wages in the subsidised industry are higher than elsewhere, which causes the other employees demand higher wages, which are then reflected in prices, resulting in inflation everywhere in the economy

21. Tariffs and Export Subsidies Advantages of export subsidies • Reduction in the cost of production for the businesses that produces those goods more goods with lower usage of resources. • It helps to increase the competitiveness of the company

22. Tariffs and Export Subsidies Disadvantages of export subsidies • They are expensive to implement and they have higher taxes. • They may encourage inefficiency of industries because the industries are dependent on subsidiary money. • It’s difficult to select who shall receive the subsidy. • Surplus may occur.

23. International Borrowing and Lending

24. What is Foreign Debt? Foreign debt is money borrowed by a government, corporation or private household from another country's government or private lenders. Foreign debt also includes obligations to international organizations such as the World Bank, Asian Development Bank (ADB), and the International Monetary Fund (IMF). International Borrowing and Lending

25. Understanding Foreign Debt 1. local debt markets may not be deep enough to meet their borrowing needs, particularly in developing countries. 2. foreign lenders might simply offer more attractive terms. 3. For low-income countries especially, borrowing from international organizations like the World Bank is an essential option, as it can provide funding it might not otherwise be able to attain, at attractive rates and with flexible repayment schedules. International Borrowing and Lending

26. The Impact of Rising Foreign Debt Excessive levels of foreign debt can hamper countries' ability to invest in their economic future. Poor debt management, combined with shocks such as a commodity-price collapse or severe economic slowdown, can also trigger a debt crisis. High levels of foreign debt have contributed to some of the worst economic crises in recent decades, including the Asian Financial Crisis and, at least in the case of Greece and Portugal, the Eurozone debt crisis. International Borrowing and Lending