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BA 187: International Trade. Homework #3 Answers: Gains in the Standard Trade Model. 2. Opening trade raises relative price of Good X. C 2. 3. Prod’n fixed at point A 1 but new consumption at C 2 with higher level of utility, U 2 . This reflects gains to exchange only. U 2.

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ba 187 international trade

BA 187: International Trade

Homework #3 Answers:

Gains in the Standard Trade Model

slide2

2. Opening trade raises relative price of Good X.

C2

3. Prod’n fixed at point A1 but new consumption at C2 with

higher level of utility, U2. This reflects gains to exchange only.

U2

1. “The inability of factors to move from one use to another

will take away any possible gains from trade.” False

Y

1. In autarky, produce & consume at pt. A1 with utility level U1.

Prod’n Possibilities

A1

U1

(PX/PY)1

X

slide3

2. Autarky Equilibrium at AH and AF

3. Differences in prod’n and utility offset one another so

relative product prices are the same in both countries.

AF

[PX /PY]AF

AH

[PX /PY]AH

2. “So long as both countries differ in both tastes and technologies, mutual gains from trade are always possible.”

False

1. Home & Foreign PPF’s and utility functions differ.

Y

UF

4. RESULT? No gains from trade, no trade occurs.

UH

PPFF

PPFH

X

slide4

1. Assuming identical utility function for Home & Foreign

2. Home & Foreign PPF’s differ due to differences in

technology or factor endowments.

QF

AF

3. Autarky Equilibrium at AH and AF

C*

4. Opening trade changes relative prices

5. New equilib. consumption at common C*.

but each country has different prod’n ;point.

AH

QH

(PX/PY)*

PPFF

PPFH

3. Explain why the ROW is becoming Americanized at the

same time as the U.S. is becoming globalized.

Y

6. RESULT? Countries look more

like one another in consumption.

X

slide5

PPF1

RS1

(PX/PY)1

Q1

(PX/PY)1

4. “Export-oriented growth is an undesirable event from the

point of view of the home country because it reduces our

terms of trade and so lowers our well-being as a nation.”

False

Relative Price of X

Y

PX/PY

RS0

PPF0

(PX/PY)0

RD0

Q0

(PX/PY)0

X

Relative Quantity of X

(qX+ q*X)/(qY + q*Y)

slide6

4. “Export-oriented growth is an undesirable event from the point of view of the home country because it reduces our terms of trade and so lowers our well-being as a nation.”False

  • Export-oriented growth shifts the nation’s PPF out proportionally more in the direction of its export good X.
  • At the original relative price (PX/PY) the relative supply of Good X increases. See slide from class.
  • The result is a lower relative price than before (terms of trade worsen for Home).
  • Combine PPF after growth with lower relative price allows nation to reach higher level of utility than before export-oriented growth occurred.
  • CONCLUSION? Export-oriented is not undesirable. Export-oriented growth improves a country’s welfare.
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