Question

In: Economics

How do you use pre-trade relative prices or opportunity costs to determine patterns of trade? Under...

How do you use pre-trade relative prices or opportunity costs to determine patterns of trade?

Under trade, the equilibrium relative price of a traded good must stay within which interval in order for trade to be mutually beneficial?

How are gains from trade reflected in a graph that involves PPF and indifference curves?

Solutions

Expert Solution

1. Opportunity cost in international trade • Quantity of a second product that must be waived to produce the first product • Cost of a product according to the theory of opportunity cost • Quantity of product delivered to produce an additional unit of another product .


2. A relative price is the price of one good compared to another. Resource allocation addresses how land, capital and labor are spent on the production of goods and services. If relative prices increase in one good versus another, demand falls in one and increases in the other.

The ratio is calculated by dividing the export price by the import price and multiplying the result by 100.

If a country is not disproportionately large or small, the intersection of two supply curves produces equilibrium terms of trade, located between two (relative) prices of the municipality. The equilibrium price ratio is p * 1 / p * 2 = Import / Export when trade is balanced. This price relationship is often called terms of trade.

When more capital leaves the country from which it enters, a country's TOT is less than 100%.

3. A frontier of production possibilities defines the set of options that society faces for the combinations of goods and services that it can produce given the available resources. Options outside the PPF are unattainable and elections within the PPF are a waste.

An indifference curve is a graph that shows the combination of two products that give the consumer the same satisfaction and usefulness and an indifference curve refers that a consumer is indifferent among the three and all points give them the same utility.


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