1.4 Solving International Prices Flashcards
What does the Home export supply curve show?
The Home export supply curve shows the amount of wheat Home wants to export at various relative prices.
What does the Foreign import demand curve show?
The Foreign import demand curve shows the amount of wheat that Foreign will import at various relative prices.
What is international trade equilbrium
The international trade equilibrium is the quantity and relative
price at which Home exports equal Foreign imports of wheat.
* This equality occurs where the Home export supply curve
intersects the Foreign import demand curve.
Does the export supply curve go flat?
yes- The flat portion of the export supply curve is a special feature of the Ricardian model
that occurs because the PPF is a straight line.
That is, with the relative price of 𝑃𝑊Τ𝑃𝐶 = 1Τ2, production can occur anywhere along
the PPF as workers shift between industries; meanwhile, consumption is fixed at
point A, leading to all the export levels between 𝐴
′ and 𝐵
′
in panel (b).
Prices of commodities from 1990-1998
fallen
What are terms of trade
The price of a country’s exports divided by the price of its imports is called the terms of
trade.
Because Home exports wheat, (𝑃𝑊/𝑃𝐶) is its terms of trade.
Foreign exports cloth, so (𝑃𝐶/𝑃𝑊) is its terms of trade.
* In this case, having a higher price for cloth (Foreign’s export) or a lower price for
wheat (Foreign’s import) would make the Foreign country better off.
What is the Prebisch-Singer hypothesis about?
The Prebisch-Singer hypothesis concerns the secular decline of the terms of trade of primary commodity prices relative to those of manufactured goods.
According to Prebisch and Singer, what historical trend did they observe regarding prices?
Prebisch noted that from the 1870s until the Second World War, the price relation turned steadily against primary production. Singer observed that since the 1870s, prices have been heavily against sellers of food and raw materials in favor of sellers of manufactured articles.
What did Raúl Prebisch and Hans Singer argue about the terms of trade for primary commodities?
They argued that the price of primary commodities would decline over time relative to the price of manufactured goods.
What supports the Prebisch-Singer hypothesis?
As people and countries become richer, they spend a smaller share of their income on goods (Engel’s law).
Industrialized countries find substitutes for mineral products in the production of manufactured goods (e.g., using less steel in cars).
What evidence goes against the Prebisch-Singer hypothesis?
Technological progress in manufacturing can reduce the price of manufactured goods as production becomes more efficient.
Cartels, such as those controlling oil prices, can increase the terms of trade for oil-exporting countries.
How does Engel’s law support the Prebisch-Singer hypothesis?
Engel’s law states that as people and countries become richer, they spend a smaller share of their income on food. As world income grows, the demand for food declines relative to manufactured goods, leading to a relative decline in the price of agricultural products.
Who was Engel’s law named after, and what does it describe?
Engel’s law is named after the 19th-century German statistician Ernst Engel. It describes the tendency for people to spend a smaller share of their income on food as their income rises.
Does Engel’s law apply to all food expenditures?
Engel’s law applies to food eaten at home but may not hold for dining out, where a constant or increasing share of income might be spent as income rises.
How does substitution in production support the Prebisch-Singer hypothesis?
Industrialized countries continually find substitutes for mineral products in manufacturing, such as using less steel in cars by shifting to plastic and aluminum. This substitution acts as a form of technological progress, leading to a fall in the price of raw materials.
What impact does technological progress have on the price of raw materials?
Technological progress, such as substituting mineral products, can lead to a decline in the price of raw materials over time.
How can technological progress in manufactured goods counter the Prebisch-Singer hypothesis?
Technological progress in manufacturing can reduce the price of manufactured goods, such as electronic products like laptops, making it a fall in the terms of trade for industrialized countries rather than developing countries.
How has OPEC affected the terms of trade for oil-exporting countries?
OPEC has managed to keep oil prices high by restricting supply in the global market, resulting in an increase in the terms of trade for oil-exporting countries.
