Inter Trade

In: Business and Management

Submitted By vyvy004
Words 673
Pages 3
Nguyen Thuy Vy
1132300396

HOMEWORK #1

1. Trade between two nations would not be possible if they have identical production possibilities frontier curves and identical community indifference curves.
2. The meaning of terms-of-trade index equals 150 is to purchase a certain number of imports, country A must give up 50% fewer exports and it could gain 50% more imports for a given number of exports. Terms of trade are determined by the relative strength of a nation’s demand for the other nation’s products. Using offer curves below to show the equilibrium’s terms-of-trade:
(PX/PY)I1

X* X
OB

Y

Y*

OA
(PX/PY)IE

(PX/PY)I2

E

* Note:
OA : offer curve of country A
OB : offer curve of country B
(PX/PY)IE: International price at E
E : The equilibrium terms of trade
3. False. The autarky equilibrium occurs when available production meets the societal satisfaction at the highest level. In autarky equilibrium, a nation’s marginal rate of transformation (measured by the slope of its production possibilities schedule) equals the marginal rate of substitution (measured by the slope of its community indifference curve); in other words, relative price is equal to opportunity cost.
4. The Heckscher-Ohlin theory explains comparative advantage as the result of differences in countries’ relative abundance of various resources.
5. False. According to the factor-endowment theory, international specialization and trade cause a nation’s cheap resource to become more expensive and a nation’s expensive resource to become cheaper.
Home country is capital abundance; foreign country is labor abundance.
+ Before trade: (K/L)H > (K/L)F (w/r)H > (w/r)F (PX/PY)H > (PX/PY)F
+ International specialization:…...

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