MGEC62H3 Chapter Notes - Chapter 5: Demand Curve, Trade Route
18 Oct 2011
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International transfers of income: shifting the rd curve. The standard trade model derives a world relative supply curve from production possibilities and a world relative demand curve from preferences. The price of exports relative to imports, a country"s terms of trade, is determined by the intersection o the world relative supply and demand curves. Other things equal, a rise in a country"s terms of trade increases its welfare. Conversely, a decline in a country"s terms of trade will leave the country worse off. Economic growth means an outward shift in a country"s production possibility frontier. Such growth is usually biased; that is, the production possibility frontier shifts out more in the direction of some goods than in the direction of others. The immediate effect of biased growth is to lead, other things equal, to an increase in the world relative supply of the goods toward which the growth is biased.
