Vecka 1 föreläsningar del 4 Flashcards
What determine the international relative price?
World RS and RD
What can The terms of trade be affected by?
Economic growth.
Describe Neutral growth?
- Happens if output increases at exactly the same rate in all sectors.
- World relative supply (RS curve) does not change.
- This does not change the terms of trade.
Describe Biased growth?
- Happens when the PP curve shifts in the direction of a particular sector.
- Ricardian model: in case of (faster) technological development in that sector.
- Heckscher-Ohlin model; relative increase in the factor that is intensively used in the sector (or is specific) e. g. in the capital Stock from Savings and investment.
What happens Wherever production increase?
Rs shift out and Tot of the exporter’s deteriorates.
Describe Export oriented growth?
- A country ‘s PP curve shifts in the direction of its exports.
- Deteriorates Tot which mitigates the welfare effect of growth for the country.
- Favours the outside world.
Describe Import oriented growth?
- A country’s PP curve shifts in the direction of its imports.
- Improves Tot which contributes to the welfare effect of growth for the country.
- Disfavours the outside world.
Why does countries trade in the standard trade model?
Because of differences in resources or productivity, and all countries gain from trading.
What happens with our TOT with export-oriented growth and Import-oriented growth?
Export: worsens our terms of trade.
Import: Improves our terms of trade.
What does the terms of trade show?
The relationship between external export and import Prices.
When can also improve terms of trade?
- If external growth takes place in our import sector.
- Import tariffs of the country imposing them if the country is large enough to influence world market prices.
What can never improve TOT?
An export subsidy.
