Question

Use standard trade model graphs to analyze trade for a country that has increasing cost production technology. For your graphs, put Good X on the horizontal axis and Good Y on the vertical axis. Be sure to draw correctly-shaped indifference curves. Label your axes, curves, and price lines. The graphs in part A and part B are for the same country, so use the same shaped PPF for both graphs. Also be sure that the indifference curves of the two graphs harmonize. (That is, if all the indifference curves from both graphs were put on just one graph, they wouldn’t cross.)

A. High World Price of Y: The world price of Good Y is greater than the country’s no-trade price of Good Y.

A1. Draw a graph showing the country maximizing economic wellbeing for the no-trade case.

Label this point. Show the amount of Y production for the no-trade case.

A2. On the same graph show the country maximizing economic wellbeing for the trade case.

Label the production point and the consumption point. Show the amount of Y production for the trade case.

A3. What happens to the amount of Y production as the country changes from no-trade to trade?

A4. What happens to the country’s economic wellbeing as it changes from no-trade to trade?

How do you know?

B. Low World Price of Y: The world price of Good Y is less than the country’s no-trade price of Good Y.

B1. Draw a graph showing the country maximizing economic wellbeing for the no-trade case.

B2. On the same graph show the country maximizing economic wellbeing for the trade case.

Label the production point and the consumption point. Show the amount of Y production and the amount of Y consumption for the trade case.

B3. On the graph, show the amount of Y imports or Y exports and label it correctly as “imports” or “exports.”

C: At what world price of Good Y can’t the country gain from trade?

Answer 1

The standard trade model is built on four key relationships:-

production possibility frontier and the relative supply curve.

Terms of trade and national welfare

Relative supply and world relative demand.

relation between relative prices and relative demand.

The standard trade model provides a framework that can be used to address a wide rangw of international issues.

The economy that is export biased or import biased improves or worsen the situation of trade.

A country's terms of trade are determined by the intersection of the world's relative supply and demand curves.

opening country to trade changes relative price. Gains can be from consumption and production. Mutual gains from trade arises in the standard model of trade. PPF may differ across countries in ways that give rise to trade due to

Differences in technology and factor endorsement, differences in preferences and choices too matters. Our economic growth directly effects our economy. They effect through trade either they show positive side or negative side. Increase in Px/Py relative price of good X results in relative fall in demand for good X relarive to good Y. They affect the movement along the PPF of countries.