Topic 4: Generic Trade Model

Question 1

Draw the generic trade model in a trading equilibrium. What good is it exporting?

Answer 1

This economy is exporting chickens, importing ducks. Note that despite the rise in the relative price of chickens compared to autarky, *relative* consumption of chickens has fallen.

Question 2

Consider a technological advance that is bias to chicken (production?)

Show the resulting production and consumtion equilibrium, assuming the country is small.

Answer 2

• If the country is small, then world prices will not be effected by the change in it’s supply.
• Chicken exporting will increase, duck exporting decrease.
• Consumption of everything increases in proportion.

Question 3

Consider a technological advancement for a large open economy, bias towards it’s export good. Show the change in the production and consumption equilibriums.

Answer 3

• Good for trade partner economy.
• Typically good for growing country - but could be bad.

Question 4

Show the changes to the production and consumption equilibriums when a large economy undergoes technological growth, bias to it’s imported good.

Answer 4

• Good for this country.
• The growth caused the TOT to rise.
• Bad for other economy. (They have to offer higher prices to get the country to maintain it’s export good production.)

Question 5

Show how growth bias to exports can decrease a countries welfare.

Answer 5

• Not something that will typically happen but theoretically possible.

Question 6

Based on the generic trade model, will Australia gain from Chinese growth?

Answer 6

• Depends on composition.
• Probably.