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BA 187: International Trade

BA 187: International Trade. Homework #2 Answers: Gains in the Standard Trade Model. 3. Terms of trade must equal LC autarky prices to induce X prod’n in LC. LC production point with trade. Q LC.

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BA 187: International Trade

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  1. BA 187: International Trade Homework #2 Answers: Gains in the Standard Trade Model

  2. 3. Terms of trade must equal LC autarky prices to induce X prod’n in LC. LC production point with trade QLC 2. With trade, small country specialization cannot produce enough to meet own needs plus all of large country needs. LC Exports SC Imports SC consumption point with trade U’SC QSC LC Imports SC Exports 1. “The greater the difference between terms of trade and autarky prices, the greater the gains from trade.” True Y Small Country = SC Large Country = LC 1. In autarky, small country produce/consume at ASC LC consumption point in autarky & trade CLC CSC ULC ASC 4. Result is max. gain to SC from max. difference between SC autarky prices & terms of trade . X

  3. EU Exports EU Imports [We0/W*] EU Exports EU Imports [We1/W*] 2. The euro’s recent decline, monetized Ricardo’s prediction for trade, Hume’s prediction for EU inflation, and ECB reactions. • Euro’s fall against US$ makes EU’s relative wage lower, increases number of goods EU exports to US. Increase in EU current account surplus. • Do not expect EU’s current account surplus to persist indefinitely. Expect inflow of specie, i.e. EU’s money supply to increase, which will increase inflation in the Euro-zone. This will increase relative wage back to initial. • ECB has not tried to defend euro (at least not until day this problem set was handed out) because increase in exports expands output in the EU & leads to more jobs both of which are good. ECB worries about inflation as euro’s depreciation is likely to lead to increase in inflation, which is bad.

  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 X

  5. PPF1 RS1 (PX/PY)1 C1 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 C0 (PX/PY)0 RD0 Q0 (PX/PY)0 X Relative Quantity of X (qX+ q*X)/(qY + q*Y)

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