2. The Home economy can produce two goods in autarky: clothes and food. Suppose the price of clothes, Pe, relative to the price of food, Pr, increases in the international marketplace. That is, the relative world price of cloth is greater than the Home's autarky relative price of cloth. Use the standard model of a trading economy to show how this change affects: (a) Production and welfare in Home (use fully labelled graph) Answer: НОМЕ РPF aut Slope P world aut Slope trade drade Since the PPF stays the same going from autarky to free trade, we can assess the impact on welfare by looking at terms of trade (ToT). Home exports clothes and imports food. Going from autarky to trade, the relative price of clothes increases for Home Home is better of with trade than with autarky (i.e. can access a bigger bundle of cloth and food than before)
2. The Home economy can produce two goods in autarky: clothes and food. Suppose the price of clothes, Pe, relative to the price of food, Pr, increases in the international marketplace. That is, the relative world price of cloth is greater than the Home's autarky relative price of cloth. Use the standard model of a trading economy to show how this change affects: (a) Production and welfare in Home (use fully labelled graph) Answer: НОМЕ РPF aut Slope P world aut Slope trade drade Since the PPF stays the same going from autarky to free trade, we can assess the impact on welfare by looking at terms of trade (ToT). Home exports clothes and imports food. Going from autarky to trade, the relative price of clothes increases for Home Home is better of with trade than with autarky (i.e. can access a bigger bundle of cloth and food than before)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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this is the solution please explain how he draw the graph
Transcribed Image Text:2. The Home economy can produce two goods in autarky: clothes and food. Suppose the price of clothes,
Pe, relative to the price of food, Pr, increases in the international marketplace. That is, the relative
world price of cloth is greater than the Home's autarky relative price of cloth. Use the standard model
of a trading economy to show how this change affects:
(a) Production and welfare in Home (use fully labelled graph)
Answer:
НОМЕ РPF
aut
Slope - P
world
Slope
aut
trade
OF
frade
Since the PPF stays the same going from autarky to free trade, we can assess the impact on
welfare by looking at terms of trade (ToT). Home exports clothes and imports food. Going from
autarky to trade, the relative price of clothes increases for Home = Home is better of with trade
than with autarky (i.e. can access a bigger bundle of cloth and food than before)
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