Problem%20Set%20_3b%20ANSWERS

Problem%20Set%20_3b%20ANSWERS - Econ 181 International...

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Econ 181: International Trade Spring 2009 Problem Set #3b ANSWERS (Due Thursday, March 5, 2009) 1. Article Analysis—The Standard Trade Model: Read this article and answer the following questions. David Barboza, “China Says Its Economy Grew by 10.7% in 2006, With Little Inflation”. The New York Times , January 26, 2007. The URL is: = a. The article states growth in the export sector has been one factor contributing to over all growth. How would we represent growth in the export sector and how is it predicted to affect the terms of trade? Growth in the export sector is called export-biased growth. We would represent this growth by shifting the production possibilities curve outward in a biased fashion in the direction of the goods that China exports and by increasing China's supply of export goods relative to import goods. An increase in export goods relative to import goods on world markets is predicted to decrease China's terms of trade. (However, in the short run the terms of trade depend also on the value of the domestic currency relative to the value of foreign currency.) b. The article states China could face protectionist policies, say tariffs, from other countries. How are protectionist policies predicted to affect China's terms of trade? An import tariff by other countries will decrease their supply of goods that are exported relative to the goods that are imported, as their producers switch to the higher priced imported-goods sector. Their demand of goods that are exported relative to the goods that are imported will increase, as their consumers switch to the lower cost exported goods sector. As a result, the terms of trade for other countries that impose the protectionists policies are predicted to increase. Because other countries produce more of the goods that they previously imported and because other countries consume less of the goods that they previously imported, the price of Chinese exports is predicted to fall and the price of Chinese imports is predicted to rise so that the terms of trade for China is predicted to decrease. c. How are protectionist policies from other countries predicted to affect China's relative supply and relative demand? Hint: draw a relative supply-relative demand diagram to help you with the logic. Because the demand of goods that are exported relative to goods that are imported will increase in other countries , the supply of Chinese goods that are exported relative to the goods that are imported will increase in China , and Chinese exporters will have a surplus of exported goods at the current prices. As a result, the price of exported goods relative to imported goods for China (the terms of trade for China) will need to fall to rid the markets of the surplus, and as it does, the quantity demanded of exported goods relative to imported goods increases in China and the quantity supplied of exported goods relative to imported goods decreases in China.
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2. Model Analysis—The Standard Trade Model.
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Problem%20Set%20_3b%20ANSWERS - Econ 181 International...

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