International Trade and Business Law
• The Standard Trade Model
o The standard trade model combines ideas from the Ricardian model and the
Heckscher-Ohlin model.
o Differences in labor, labor skills, physical capital, land, and technology
between countries cause productive differences, leading to gains from
trade.
o These productive differences are represented as differences in productive
possibilities, i.e. the productive capacities of nations.
o A country’s production possibilities determine its relative supply curve.
• Key Assumptions
o Two factors used in production: labor and land
o Two goods are produced and consumed: cloth and food
• Production Possibilities
o The production possibilities frontier (ppf) of an economy shows the
maximum amount of goods that can be produced for a fixed amount of
resources (factor of Production).
o In order to produce more cloth, the economy needs to produce less food (so
there is an opportunity cost)
o Producing more cloth requires moving labor and land from food production
into cloth production
o The opportunity cost of producing cloth in terms of food rises as the
economy production mix shifts towards cloth and away from food.
• Consumer Preferences
o Consumer preferences and prices determine consumption choices.
• The Standard Trade Model: A Summary
o The standard trade model is a synthesis of the Ricardian and Heckscher-
Ohlin Models.
o It shows that:
