Answer to Question #206890 in Economics for Lubi

Question

 In real life setting, explain the main concept of the standard theory of trade.

Answer 1

The Standard Model, like the classical theories of international trade, assumes that the world economy is represented by two countries, each of which produces two goods: X and Y. In addition, the standard model uses the following assumptions: in the process of consumption, buyers seek to provide maximum effect (graphically depicted using indifference curves), and manufacturers seek to maximize profits; in the domestic and world markets there is perfect competition, in which the equilibrium price is set at a level corresponding to the marginal costs of production.