Question

In: Economics

In a two-country Classical model of trade with many commodities, briefly explain what would happen to...

In a two-country Classical model of trade with many commodities, briefly explain what would happen to the structure of trade in each of the following cases:

(a) an increase in wages in one country
(b) a change in the exchange rate
(c) an improvement in productivity (lowering of the labor requirements/product) in one
country
(d) an increase in transportation costs.

Solutions

Expert Solution

(a)an increase in wages in one country

An increase in wages increases the cost of production for the firm producing it which forces the producers or sellers to raise the prices so that they do not lose profits.As the price rises,domestic as well as international consumers will buy less of it and thus less output will be produced.Since less output will be produced,hence less output will be sold in domestic market and similarly less output will be traded.

(b)a change in exchange rate

An exchange rate is the rate at which one currency will be exchanged for another.A currency can appreciate i.e. an increase in the value of one currency in relation to another currency or depreciate i.e. a decrease in the value of one currency in relation to another currency.Currency appreciation negatively affects the trade(exports) of a country as the goods of domestic country become expensive to foreigners and currency depreciation positively affects the trade(exports) of a country as the goods of domestic country become cheaper to foreigners.

(c)an improvement in productivity in one country

An improvement in productivity is a positive sign for any firm because it leads to production of more output while hiring same number of labourers as before.So in this case wages remain constant but producer gets more output to sell which will lead to increase in trade.

If a firm has a target output to be produced and productivity increases then it can produce the target output with less number of labourers which can reduce the amount of wages to be paid.So in this case output remains constant but cost of production decreases which will again lead to increase in trade.

(d)an increase in transportation costs

Transportation cost is the cost of moving produced goods from a factory or any place of production to a different location from where they can be easily offered to consumers.Increase in transportation costs increases the cost of production for the producers which force them to raise the prices.As price rises,domestic as well as international connsumers will demand less of it and thus less output will be produced.So less production means less output will be sold in domestic market and less output will be traded.


Related Solutions

Explain what would happen to the terms of trade if home imposes a tariffs on imports...
Explain what would happen to the terms of trade if home imposes a tariffs on imports from the rest of the world under the two set of assumptions below (10 points, 5 points for each case): Home is considered a large country (hence, it is able to affect world prices) Home is considered a small country (unable to affect world prices) (Noted: Assume no retaliations from the foreign countries.)
This question is about trade policy. List and briefly explain two distinct reasons that a country...
This question is about trade policy. List and briefly explain two distinct reasons that a country might want to have positive tariffs on foreign goods. Given that there are many reasons why governments might be motivated to have significant tariffs on foreign goods, why do we have so many trade agreements to limit them?
Using the Classical model with indifference curves (one factor and two goods), explain how free trade...
Using the Classical model with indifference curves (one factor and two goods), explain how free trade may affect the social utility level of an economy. (Assuming that the economy is completely specialized in production.) Explain how the change in welfare can be measured in terms of a change in national income. How can the change in welfare be disaggregated into the production gain and the consumption gain? What is the meaning of production gain and consumption gain? Draw diagram(s) to...
Explain what would happen to the terms of trade should home offer a subsidy to home...
Explain what would happen to the terms of trade should home offer a subsidy to home producers that export to the rest of the world under the two set of assumptions below (10 points, 5 points for each case): Home is considered a large country (hence, it is able to affect world prices) Home is considered a small country (unable to affect world prices) (Note: Assume no counter-action by foreign countries.)
Using the AD-AS model, graph and explain what would happen to unemployment and inflation in the...
Using the AD-AS model, graph and explain what would happen to unemployment and inflation in the following situations. a) Assume the economy begins at potential output. Consumer confidence rises. What is the short run effect? b) Starting with the previous question, consumer confidence rises. What is the long run effect?
Briefly explain what happen in the Watergate scandal
Briefly explain what happen in the Watergate scandal
8. Explain how a mutually beneficial trade is possible in a two-country two-good model even when...
8. Explain how a mutually beneficial trade is possible in a two-country two-good model even when one of the countries has absolute advantage in the production of both the commodities.
Once trade opens up in a two country two commodity model of the Heckscher-Ohlin theorem, what...
Once trade opens up in a two country two commodity model of the Heckscher-Ohlin theorem, what happens to the prices of the two commodities in each country? What happens to the returns to the factors of production in each country?
Using Grossman model explain what would happen to the demand for health stock.Assume that John was...
Using Grossman model explain what would happen to the demand for health stock.Assume that John was working as a construction worker that is a very physically demanding job (meaning high depreciation rate of health). He was able to find another job in an office that would provide the same income but it is much safer and less physically exhausting meaning that his health depreciation rate is now lower. What would happen to John's demand for health stock? Draw a figure...
According to the Ricardian model and the Specific Factors model, cross-country trade would not wipe out...
According to the Ricardian model and the Specific Factors model, cross-country trade would not wipe out cross-country inequality in income. Why?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT