ECO 3111 Chapter 5: The Standard Trade Model Ch 5

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aquamarinesardine37

19 Apr 2018

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4 key relationships: the relationship between the ppf and the relative supply curve, relationship between relative prices and relative demand, the determination of world equilibrium by world relative supply and demand, the effect of the terms of trade. Terms of trade price of a countries exports divided by the price of its imports. The rise in welfare is an income effect, the shift in consumption at any given level of welfare is a substitution effect. Income effect tends to increase consumption in both goods. Substitution effect acts to make the economy consume less c and more f. A rise in the terms of trade increases a countries welfare, while a decline in the terms of trade reduces its welfare. To find pc/pf we use the intersection of world relative supply and world relative demand. World relative supply upward sloping because of an increase in pc/pf.

Related Questions

Consider the following unit labor requirements for two countries, Essos and Westeros, within the context of the Ricardian model of trade, where the two goods are food 1 (F) and horses (H) (you may assume that bushels and horses are equivalent units). Please see attached screenshot for data.

(a) Which country has an absolute advantage in food? In horses? Why?

(b) Which country has the comparative advantage in food? In horses? Why?

(c) Assume that there is autarky, and both goods are produced in each country. What is the relative price of food in terms of horses in each?

(d) Now assume that there is free trade, and the free trade relative price falls exactly between the autarky prices you derived in part. Graph this trading equilibrium in terms of relative supply and relative demand.

(e) Demonstrate, numerically, the gains from trade in Essos and Westeros (hint: rely on trade as an indirect method of production).

(f) Let the price of food, PF = 10 gold coins, and the price of horses, PH = 9 gold coins. Calculate the relative wage of the Westerosi to Essosi.

(g) What do you observe about the relative wage compared to relative productivities? What does this imply? **

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1. According to World Bank, nations with a per capita income of $15,000 can be classified as

(a) low-income economies

(b) lower-middle-income economies

(d) high-income economies

2. Which one of the following is NOT a characteristic of developing nations?

(a) Unequal income distribution

(b) More agrarian economies

(d) Higher infant mortality

3. A characteristic of a primary product is that the supply and demand are relatively price

(a) elastic

(b) unit elastic

(d) perfectly elastic

4. Developing nationsâ terms of trade (TOT) are worsening over time because

(a) relative prices of primary exports to imports are unstable and falling.

(b) relative prices of primary exports to imports are stable and falling

(d) the prices of their primary export product are rising over time.

5. Most developing countries acquire the necessary primary products by importing them from advanced nations.

True or false

violetbadger964

5. Canada goes to considerable lengths to protect its television program and magazine producers from U.S. competitors. The United States often seeks protection from food imports from Canada. From an economywide viewpoint, these efforts are:

a. Political motivations to impose government control over various aspects of the two economies

b. Desirable since they protect the jobs of entertainment workers in Canada and farmers in the U.S.

c. Desirable since without them Canadian cultural identity will be weakened and the U.S will suffer food shortages.

d. Misguided because the enhanced output from specialization based upon comparative advantage is restricted.

8. Germany and China are countries that trade with each other. If Germany has a comparative advantage in cars and China has a comparative advantage in shoes, which of the following is a correct statement about the effects of trade between these nations?

a. Both countries will lose jobs through trade and be worse off

b. There will be a net loss of employment in China

c. Both countries are likely to be better off, and world production will increase

d. Germany will lose jobs in the car industry

10. Money Prices 2003 2004

Hospital Room(1-day) $250 $275

Hotel Suite (1- night) $350 $375

Based on the table above which of the following is true?

a. The money prices of both goods increased, the relative price of hospital rooms increased, and the relative price of hotel suites decreased

b. The money prices of both goods increased the relative price of hospital rooms decreased and the relative price of hotel suites increased.

c. The money prices of both goods increased and the relative prices of both goods increased.

d. The money prices of both goods increased and the relative prices of both goods decreased.

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ECO 3111 Chapter 5: The Standard Trade Model Ch 5

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