Shenkars Clsuter Model

1. Gains from trade:

1. International trade can increase real income, consumption level and economic welfare.

2. International trade is the exchange of goods and service across the world.

3. International trade enlarges the market and the scope of the division of labor.

4. Economists argue that free trade opens an economy to less expensive production.

5. When there is a free trade, goods and services produced all over the world are available to the people.

2. Term of trade:

Term of trade is the ratio of the price of a country’s exports to the price of its imports.

terms of trade = price index of exports price index of imports.

3. Importance of term of trade:

1. Term of trade is the economic factors affecting a country’s foreign trade in goods and services.

2. The terms of trade are a measure of the relative prices of export and imports.

3. The terms of trade tend to move against the less developed countries.

4. An abrupt change in the terms of trade of a counter can cause a serious balance-of-payments problems.

5. Favorable change in the terms of trade may bring about a proportionately greater fall in the demand for exports leading to a worsening of the balance of payments situation.

4. Others term of trade:

1. The net barrier term of trade is the ratio of export and import prices when volume is constant.

2. The gross barter terms of trade is the ratio of a quantity index of exports to a quantity index of inputs.

3. The income term of trade is the ratio of the value of exports to the price of imports.

4. The single factorial term of trade is the net barter terms for changes in the productivity exports.

5. Two country model:

1. Term of trade is defined for two country and two commodity as the ratio of the price a country must receive for its export commodity to the price it pay for its import commodity.

2. Import of one country is the export of other country.

Example:

If a country exports 100...