Answer the given question with a proper explanation and step-by-step solution. Consider the rest of the world with free trade (production at S1 and consumption at C1 ), as shown in the graph on the right in figure 4.4A of your textbook. The international relative price of cloth now changes to 1.3 W/C. a. Using a graph, show the effects of this change in the international relative price on production and consumption in the rest of the world. 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

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Answer the given question with a proper explanation and step-by-step solution.

Consider the rest of the world with free trade (production at S1 and consumption at C1 ), as shown in the graph on the right in figure 4.4A of your textbook. The international relative price of cloth now changes to 1.3 W/C.

a. Using a graph, show the effects of this change in the international relative price on production and consumption in the rest of the world.

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

 

Figure 4.4A

A. With Indifference Curves and Production-Possibility Curves
Wheat
80
50
40
N
S₂₁
So
O
0 20 40 60
A
United
States
B. With Demand and Supply Curves
Price of cloth (W/C)
Cloth
imports
20 40
Sus
B
Price =
1 W/C
60
Cloth
2 W/C
Dus
Cloth
Wheat
55
30
15
O
1
0.67
11/2
Price of cloth (W/C)
O
T
C₁
S₁
60 80 100
Cloth
exports
60 80 100
Rest of
the World
Price =
0.67 W/C
1 W/C
Sf
Cloth
Cloth
Transcribed Image Text:A. With Indifference Curves and Production-Possibility Curves Wheat 80 50 40 N S₂₁ So O 0 20 40 60 A United States B. With Demand and Supply Curves Price of cloth (W/C) Cloth imports 20 40 Sus B Price = 1 W/C 60 Cloth 2 W/C Dus Cloth Wheat 55 30 15 O 1 0.67 11/2 Price of cloth (W/C) O T C₁ S₁ 60 80 100 Cloth exports 60 80 100 Rest of the World Price = 0.67 W/C 1 W/C Sf Cloth Cloth
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