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BA 187: International Trade

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

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  1. BA 187: International Trade Homework #3 Answers: Gains in the Standard Trade Model

  2. 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

  3. 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

  4. 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

  5. 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)

  6. 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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