The document summarizes a presentation on the standard trade model. It discusses three main topics: the standard model of a trading economy, tariffs and export subsidies, and international borrowing and lending. The standard model examines production possibilities, supply and demand curves, and the effects of terms of trade. Tariffs and export subsidies are trade policies that countries use to restrict or promote international trade. International borrowing and lending relates the standard trade model to trade over time through foreign debt.

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