a. Suppose that the international relative price of cloth goes up. How will this affect the trade line and optimal level of consumption in the cloth exporting country? How would this impact the production in the exporting country? Show on the graph and explain (don’t worry about numbers). b. Is this change in the international relative price an improvement or deterioration in the terms of trade of the rest of the world? According to your graph, does the rest of the world gain or lose well-being? Explain!
a. Suppose that the international relative price of cloth goes up. How will this affect the trade line and optimal level of consumption in the cloth exporting country? How would this impact the production in the exporting country? Show on the graph and explain (don’t worry about numbers). b. Is this change in the international relative price an improvement or deterioration in the terms of trade of the rest of the world? According to your graph, does the rest of the world gain or lose well-being? Explain!
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
a. Suppose that the international relative price of cloth goes up. How will this affect the trade line and optimal level of consumption in the cloth exporting country? How would this impact the production in the exporting country? Show on the graph and explain (don’t worry about numbers).
b. Is this change in the international relative price an improvement or deterioration in the terms of trade of the rest of the world? According to your graph, does the rest of the world gain or lose well-being? Explain!
Transcribed Image Text:3. Use the following figure to answer to the questions:
A. With indifference curves and production-possibility curves
Wheat
Wheat
United
Rest of
the World
States
80
55
50
40
30
So
Price =
1 WIC
15
Price =
0.67 WIC
20
40
60
Cloth
60
80
100
Cloth
2 WIC
1 WIC
B. With demand and supply curves again
Price of cloth (WIC)
Price of cloth (WIC)
Sus
2
Cloth
St
B
exports
0.67
1
1
Cloth
imports
Df
Dus
20
40
60
Cloth
60
80
100
Cloth
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