Standard Trade Model and variation of the model from Ricardian model and Heckscher-Ohlin theory

The Standard Trade Model combines the ideas of Ricardian model and Heckscher-Ohlin

Model and is based on four key relationships.

1.)    The relationship between PPF and relative supply curve.

2.)    The relation between relative demand and relative prices.

3.)    The relation between World equilibrium, World relative supply and World relative demand.

4.)    The way a nation’s welfare is influenced by the terms of trade.

The principal features of the Standard Trade Theory are

1.)    The Production Possibility curve represents the Productive potential of an economy.

2.)    Factor and goods exist in competitive markets. So all economic agents like suppliers, factor services, households and firms compete in the markets in which they operate.

3.)    A country’s relative supply curve is determined by movement along production possibility frontier at different relative prices of goods.

4.)    Relative demand (RD) and Relative Supply (RS) curves can be used to describe Autarky and World Equilibrium.

Difference between Standard Trade Theory and Other Theories

Ricardian and Heckscher-Ohlin models emphasise on identifying the underlying reasons for comparative advantage. While productivity differences decide the comparative advantage under Ricardian model, factor endowments decide the same in HO model. Standard Trade model adopts common features of various models and develops a set of techniques and tools which can be used for analysis of different trade and trade policy problems,

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