Ch3 Neoclassical trade theory.pptVIP

Ch3. Neoclassical trade theory Although basic propositions regarding the nature and impact of international trade were developed by economists in the Classical school in the late 18th and 19th centuries, the Classical economists were limited considerably in their analysis by the labor theory value and the assumption of constant cost. The development of Neoclassical economic theories provided tools for ananlying the impact of international trade. The application of Neoclassical theory to international trade issues and later refinements of these ideas constitute the basic contemporary theory of trade. 1. The theory of consumer behavior 1.1 consumer indifference curves (CI) Traditional mircroeconomic theory begins the analysis of individual consumer decisions through the use of the consumer indifference curve. Adopting the basic postulate that more of any goods is preferred to less, the S1,S2,S3 curves illustrate different levels of satisfaction, with level S3 being greater than level S2. Cardinal utility and ordinal utility Cardinal utility is actual numerical values can be attached to levels and change of welfare. Ordinal utility reflects the assumption that a consumer can rank different levels of welfare, even if he cannot specify precisely the degree of which welfare is different. IC indicates that the consumer is indifferent among all points on the curve. The feature of IC: Transitivity Downward-sloping (goods are substitutes) Convex to the origin (diminishing marginal rate of substitution MRS) Cannot intersect for the individual consumer Marginal rate of substitution, is defined as the quantity of goods Y that must be taken away from a consumer to keep that individual at the same level of welfare when a specified additional amount of goods X is given to the consumer. It is the name given to reflect the slope of the indifference curve, reflecting the law of diminishing marginal utility. A community indifference curve ( country indifference curve): a com