1. BA 187: International Trade Homework #3 Answers: Gains in the Standard Trade Model

2. (P X /P Y ) 1 1. “The inability of factors to move from one use to another will take away any possible gains from trade.” False Y X Prod’n Possibilities A1A1 1. In autarky, produce & consume at pt. A 1 with utility level U 1. U1U1 U2U2 C2C2 3. Prod’n fixed at point A 1 but new consumption at C 2 with higher level of utility, U 2. This reflects gains to exchange only. 2. Opening trade raises relative price of Good X.

3. [P X /P Y ] A H [P X /P Y ] A F 3. Differences in prod’n and utility offset one another so relative product prices are the same in both countries. PPF H PPF F 1. Home & Foreign PPF’s and utility functions differ. 2. “So long as both countries differ in both tastes and technologies, mutual gains from trade are always possible.” False Y X AHAH AFAF 2. Autarky Equilibrium at A H and A F UHUH UFUF 4. RESULT? No gains from trade, no trade occurs.

4. (P X /P Y ) * 4. Opening trade changes relative prices 1. Assuming identical utility function for Home & Foreign PPF H PPF F 2. Home & Foreign PPF’s differ due to differences in technology or factor endowments. Y X AHAH AFAF 3. Autarky Equilibrium at A H and A F 3. Explain why the ROW is becoming Americanized at the same time as the U.S. is becoming globalized. QFQF QHQH C*C* 5. New equilib. consumption at common C *. but each country has different prod’n ;point. 6. RESULT? Countries look more like one another in consumption.

5. (P X /P Y ) 0 4. “Export-oriented growth is an undesirable event from the point of view of the home country because it reduces our terms of trade and so lowers our well-being as a nation.” False Y X PPF 0 Q0Q0 RD 0 RS 0 (P X /P Y ) 0 P X /P Y Relative Price of X (q X + q* X )/(q Y + q* Y ) Relative Quantity of X PPF 1 RS 1 (P X /P Y ) 1 Q1Q1

6. 4. “Export-oriented growth is an undesirable event from the point of view of the home country because it reduces our terms of trade and so lowers our well-being as a nation.” False Export-oriented growth shifts the nation’s PPF out proportionally more in the direction of its export good X. At the original relative price (P X /P Y ) the relative supply of Good X increases. See slide from class. The result is a lower relative price than before (terms of trade worsen for Home). Combine PPF after growth with lower relative price allows nation to reach higher level of utility than before export-oriented growth occurred. CONCLUSION? Export-oriented is not undesirable. Export-oriented growth improves a country’s welfare.