INTL 2200 Lecture Notes - Lecture 3: W. M. Keck Observatory, Real Income, Indifference Curve

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25 Mar 2016

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Nation 2 has an advantage at y because if one country has an advantage in x relative to y, then the other has an advantage in y relative to x. They will import x below a price of p3 (the cost for them to produce x themselves). Based on fig 1. 1, nation 1 is exporting x, and nation 2 is importing x. triangle abe represents the exports, triangle a"b"e" represents the imports. Fig 1. 2 and fig 1. 3 represent the supply of exports by nation 1, and the demand of imports by nation 2, respectively. Equilibrium is attained when the exports of home equals the imports of foreign, in quantity. Fig 1. 4 shows that at a price of p1, exports are way more than imports. Price will fall to equilibrium price for continued trade. Demand in perfect competition, when prices are too high, they"ll come down to equilibrium price. The opposite is true too if imports > exports, price will increase.

Related Questions

1.In the Ricardian model, wages are equal across industries because:

A.employers care for their workers.

B.workers prefer to work in exporting industries.

C.workers are freely mobile between industries.

D.workers are freely mobile between countries.

2.Suppose that the U.S. price index for its imports rose from 100 to 120 from 2010 to 2011 and the price index for its exports remained unchanged. Which of the following statements is CORRECT?

A.The U.S. terms of trade worsened between 2010 and 2011.

B.The U.S. terms of trade improved between 2010 and 2011.

C.The U.S. terms of trade improved in 2010 and worsened in 2011.

D.There was no change in the U.S. terms of trade between 2010 and 2011.

3.Assume that marginal product of labor is constant. If the maximum number of units of cloth produced is 300 and the maximum number of units of corn produced is 600, then with a MPLcloth = 2, what is the MPLcorn?

A.4

B.5

C.6

D.7

4.Suppose after opening up for trade the Home country produces 60 units of chemicals and 20 units of clothing. But Home consumes 40 units of chemicals and 60 units of clothing. What is the international price of chemicals?

A.1/2 unit of clothing per unit of chemicals

B.one unit of clothing per unit of chemicals

C.two units of clothing per unit of chemicals

D.three units of clothing per unit of chemicals

5.It can be shown that differences in âbefore-tradeâ relative prices will determine:

A.which nation has the absolute advantage.

B.which good each nation will export or import.

C.the quantity traded by each nation.

D.which nation has higher wages.

6.Suppose after opening up for trade the Home country produces 60 units of chemicals and 20 units of clothing. But Home consumes 40 units of chemicals and 60 units of clothing. Which product does Home export?â

A.Clothing

B.Chemicals

C.It exports neither chemicals nor clothing.

D.It exports both chemicals and clothing.

4. (Part A) Suppose the USA and China are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:

Table 1. Production of Apparel or Chemicals in the USA and China.

The Opportunity Costs of producing one product or the other are displayed.

1000âs of Tons of

Apparel Units Chemicals

Nation Produced or Produced

USA 50 or 150

China 30 or 60

Which nation has the comparative advantage in producing Apparel? Which nation has the comparative advantage in producing chemicals? Explain how you arrived at these conclusions.

Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Apparel and which nation should specialize in producing Chemicals, and Why?

Suppose a trade proposal is made to exchange 1 thousand units of apparel for 2.5 tons of chemicals. Would these terms of trade (1 Apparel : 2.5 Chemicals ) be acceptable to, and mutually beneficial for, both the USA and China as trading partners? Why or why not?

What are the âpayoffsâ from open trade? What are some of the limitations associated with open trade?

4. (Part B) Suppose the USA and EU are trading, and currencies must be exchanged as goods/services are imported and exported between the two regions. The $USD is the currency of the USA, and the â¬Euro is the currency of the EU.

a. Are the following statements correct or incorrect? Why or why not?

âIf the USA is exporting its goods to the EU, these exports from the USA to the EU create a demand for â¬Euros in the Currency Exchange Market for â¬Euros.â

âIf the USA is importing goods from the EU, these imports to the USA from the EU create a supply of $USD in the Currency Exchange Market for $USDâs.â

âIf the EU is importing goods from the USA, these imports to the EU from the USA create a demand for $USD in the Currency Exchange Market for $USDâs.â

Throughout your answer to any of these other questions, use graphs as needed (all axes and functions completely labeled) to accompany your written analyses.

Fill in the blanks. In case you get stuck, Iâve provided a list of all the missing words in alphabetical order at the end of the question. According to David Ricardoâs model, the pattern of trade between nations is determined by the distribution of ______________________ advantage. Unlike the ______________________ advantages described by Smith, Ricardoâs explanation allows for trade between partners in which one nation has superior ______________________ in the manufacture of all goods. Thatâs because Ricardoâs principle rests on the economic concept of ______________________ (defined as the amount of good Y that must be sacrificed when the nation produces a unit of good X) which can never be concentrated in just one nation. The model is usually specified with barter-style trade, meaning that we use ______________________ rather than ______________________ prices for the tradable goods. The price of each good on international markets must be higher than ______________________ in the exporting countries and lower than ______________________ in the importing countries. Although all parties can benefit from trade, there is no reason to think that they benefit equally. The ______________________ are derived from the difference between the opportunity costs of production in each nation and then distributed between participating nations according to the market price. As the price of a nationâs ______________________ good rises, it receives a larger share of the gains from trade, and we say that its ______________________ are appreciating. However, nations that ______________________ this good will receive a smaller share of the benefits from trade.

Absolute

Comparative

Export

Gains from trade

Import

Max WTP

Min WTA

Money

Opportunity cost

Productivity

Relative

Terms of trade

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INTL 2200 Lecture Notes - Lecture 3: W. M. Keck Observatory, Real Income, Indifference Curve

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