Explaining economic models
Models are hypothetical constructs that correspond to the economic processes through set variables and consistent relationships. A model will assist the economist to separate complex chains of cause and effect between several interrelated elements within an economy. These models fall in two broad categories, the macroeconomic models and the computable general equilibrium models. The first category concentrates on the difficulties of the economy and provides a scope for individuals with an interest in financial control. It contemplates on the fundamental pattern of production and gives insight on the long-term effects of aspects for instance global warming on the economy.
Which of 3 models would you use to explain patterns of trade and why?
Ricardian model
The Ricardian model examines the trade pattern and aspects that countries must focus during production while considering their comparative advantage. It states that countries will generate what they are only skilled at producing and not an assortment of different products. It ignores factors like relative amount of labor and capital within a country. The model employs the simplest way in demonstrating comparative advantage and the proceeds from trade in a broad equilibrium setting. It has several assumptions such as; production totally uses labor as its only source of input. This means that in each country and sector, what establishes technology is the labor involved for each unit of output. Another assumption is that labor can move substantially within a country, between regions. If US imports cheap clothes from Indonesia, the clothing sector will not be able to compete with the contemptible imported apparels an aspect resulting from the cheap prices. The US workers will sequentially move to other sectors. This means that, the income must be similar in both sectors.
Labor cannot shift between countries a factor that makes salary equal in these two countries. If the prices of all commodities and all the earnings double, all the relative prices remain unaffected because nothing significant has changed. This guarantees a level of freedom, where consumers can have a price equal to the other with no loss of the overview, despite the commodity used. The model is beneficial as it exemplifies several essential insights of international trade theory.
Which model would you use to explain effects of trade on different groups of people and why certain groups would respond to trade in a certain way? And why?
Specific factor model
The factor model displays the effects that global trade has on the distribution of profits. It focuses on how modifications in the relative cost affect the aspects of earnings. The model explains the consequence of trade to an economy, where one aspect of production is distinct to an industry. A distinct factor is one that is static between industries in reaction to changing in the market setting. It examines who profits, loses and how trade influence earnings from labor, land and capital by knowing how the change in the relative price affects these aspects. This model assumes that an economy uses two factors of fabrication to produce two goods in an ideal competitive market. These factors are labor and capital, where capital is specific to an industry. Labor is mobile between industries. The assumption is that, since capital is immobile it is different between the industries.
Trade may rise because of disparity in endowment, technology or demand; if the price of one-commodity increases, the cost of marginal products will increase above the normal wage. This will encourage industries to hire more workers and expand on production. When a feature of manufacture like profit is immobile, some individuals, owners of capital, will lose from liberated trade. Workers who are liberally mobile between firms may gain or lose.
If you chose 2 different models for each part, how would you reconcile them with each other? What does this exercise tell you regarding the role of theoretical models in increasing our understanding of real world?
Countries deal in the Ricardian model to benefit on what they generate competently to optimize on the use of resources. In this model, both countries gain from free trade where they can deal on the surplus for other goods. The factor model is closer to the authentic world, unlike the Ricardian model because it addresses the influence international trade has on income distribution. Both models have factors of production where Ricardian has only one factor, labor, which is permanent to all countries. The factor model has three factors, where one factor, labor, is mobile across regions while the other factors are specific to the goods utilized. To understand the situation in the real world, theoretical models offer effective constructs that enable individuals to emerge with the realistic solutions. Economically the models give a distinction of the rational concepts and the manner in which ethical decisions occur from the production factors. The models can also have set backs. When individuals fail to obtain the right definition and ideas about a particular construct, this might affect the production factors and limit the theoretical applications of the models. Effective application of the models usually depends on whether the production factors fit to the specific model and offers the right concept.
