Four key relationships upon which the Standard Model is based. Please list each of the four relationships.

Question: The Standard Model

The Standard Model of Trade is a general model that accommodates other models which reference specific sources of comparative advantage, e.g. Ricardian model (differences in labour effectiveness) and Heckscher-Ohlin model (references ‘factors of production').

There are four key relationships upon which the Standard Model is based. Please list each of the four relationships and give one example for each.

ANSWER:
The Standard Model of Trade determines the relative prices, relative supply, and relative demand by aiming for the nation's welfare concept. Four key relationships are outlined below,

- Relative supply and production possibility
Assuming each country is producing two products such as clothes (C) and foods (F). The production possibility frontier of each country is illustrated by TT. The point on the production possibility frontier is dependent on the cloth relative to food (Pc/Pf).

Considering the market price, the market production level will select the level, maximizing its deliverables (PcQc+PfQf) while Qf is the quantity of produced food and Qc is the quantity of produced cloth (The Standard Trade Model, 2021, p113(2)). There is a directly proportional relationship between supply demands and prices. In case the relative supply demands for clothes or foods are raised then the price range will be automatically enlarged.

- Relative demand and relative price
The connection between trading, consumption, and production are articulated by measuring the value of the economy's consumption PcQc+PfQf=PcDc+PfDf = V
Dc and Df are the consumption of clothes and foods respectively

The curves have the characteristics such as the offering of fewer food products to the individuals can make them equally well off, and flattering to move to the right. The economy will consume the point of the iso-value line, yielding the maximized probable welfare.

- Determination of global equilibrium by world relative demand and world relative supply
In case, the demand for cloth items is visible in the global context, the supply demands will be enlarged in the global context. Besides, the world relative demands and world relative supply combined provoke the maximization of the cloth item's price rate across the world.

- Effects of terms of trade
In case of an increase of (Pc/Pf) in a country, it will initially be made better by exporting the cloth items. Declination of (Pc/Pf), the country will be made worse off. The rise of terms of trade can increase the country's development and welfare while the decline of trade teams has a scope of reducing the country's social welfare level.

Related:

Predict trade flows between two countries

Discuss Absolute and Comparative Advantage

List relationships of Standard Model

Discuss Controversies in Trade Policy

Instruments of Trade Policy

Discuss Different market structures

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