HW_2 Answer key - ECON 178: International Trade Spring 2009...

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ECON 178: International Trade Spring 2009 Assignment #2 Answer Key 1) The terms of trade of the U.S. are given by the world relative price of manufactures in terms of raw materials (P M /P R ). The terms of trade change can be determined by the shifts in the world relative supply and demand curves. Note that in the following answers, world relative supply (RS) and relative demand (RD) are always given in terms of M relative to R. a) Korea’s increased automobile production increases the world relative supply of manufactures. The world relative supply curve shifts out, decreasing the world relative price of manufactured goods and deteriorating the US’s terms of trade. b) An increase in the U.S.’s import tariff on oil (raw material good) will lower its internal relative price of manufactures. This price change will decrease U.S.’s relative supply of manufactured goods and increase U.S.’s relative demand for manufactured goods. This, in turn, will depress the world RS and raise the world RD (i.e., world RS shifts in and world RD shifts out). The world relative price of manufactures goes up and U.S.’s terms of trade improve. 2) Since India is similar to China in terms of its resource abundance (both are relatively labor abundant countries compared to the rest of the world), it is likely to have a similar pattern of comparative advantage to that of China and will export products the US currently imports and China currently exports. Therefore, India’s opening to trade will lead to an increase in the relative supply of US imports (and Chinese exports) lowering
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HW_2 Answer key - ECON 178: International Trade Spring 2009...

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