Standard Trade Model

Question 1

Explain what terms of trade are and how its rise affect a country’s welfare.

Answer 1

A rise in terms of trade increases welfare and a decrease in terms of trade decreases welfare. Value of exports divided by the value of imports.

Question 2

Give two reasons why biased growth is usually common.

Answer 2

1. Ricardian model showed that a rise in productivity of one sector will expand the production possibilities in the direction of that sector.
2. From the Heckshler Ohlin model, we know that an increase in a certain factor of production will lead to more growth in the sector in which this factor is specifi

Question 3

Give a general statement about export vs import biased trade.

Answer 3

Export biased trade tends to worsen an economy’s terms of trade which is welfare reducing and an import biased growth tends to improve a country’s terms of trade which is welfare enhancing.

Question 4

Under wich conditions can immiserizing growth occur?

Answer 4

If RS and RD are so steep that a small change in relative quantities has an outisez impact on relative prices which would then have a big impact on the terms of trade.

Question 5

Under wich conditions can immiserizing growth occur?

Answer 5

If RS and RD are so steep that a small change in relative quantities has an outisez impact on relative prices which would then have a big impact on the terms of trade.

Question 6

Can a change in the terms of trade worsen an economy’ welfare so much that it is worse off than if it were in autarky?

Answer 6

No

Question 7

Derive the slope of the PPF. What is it equal to?

Answer 7

bQc/aQf = Pc/Pf

Question 8

What is the main difference in the effects of a production subsidy vs an export subsidy.

Answer 8

The production subsidy doesn’t higher domestic prices like the export subsidy does.

Question 9

State the effect of a tariff on food imports on prices and, demand and terms of trade for the imposing country.

Answer 9

A tax on imports of food will cause higher home food prices, more food production, less cloth production, higher world cloth prices and better terms of trade for the imposing country.

Question 10

State the effect of a tariff on food imports on prices and, demand and terms of trade for the imposing country.

Answer 10

A subsidy on exports of cloth will cause higher home cloth prices, more cloth production, less food production, lower world cloth prices and lower terms of trade for the imposing country.