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)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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