Chap007EndofChapterproblems

Chap007EndofChapterproblems - Chapter 07 - Offer Curves and...

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Chapter 07 - Offer Curves and the Terms of Trade CHAPTER 7 OFFER CURVES AND THE TERMS OF TRADE V. Answers to End-of-Chapter Questions and Problems 1. A change in tastes by the home country’s consumers toward greater relative preference for the import good would increase the willingness of the country to trade. In addition, a rise in income (provided that imports as a whole are not “inferior goods”) would also make the country more willing to trade at each terms of trade. Other events leading to greater willingness to trade would be, for example, increased productivity in the export industry and trade negotiations that resulted in a lowering of trade barriers by the home country. 2. If the demand increase for the export good is by the foreign country, the terms of trade will improve by an equal amount in either instance. If the country is large, the normal upward shift in the foreign offer curve occurs; if the country is small, the straight-line offer curve by the foreign country pivots to higher terms of trade for the home country. If the demand increase for the export good is by home country citizens, the home country’s offer curve pivots inward. If the country is large, the terms of trade will improve, but, if the home country is small, there will be no impact on the terms of trade since a small country faces a foreign offer curve that is a straight line from the origin. 3. The terms of trade for country I will definitely deteriorate, since both shifts are working in that direction. However, the impact on the volume of trade is indeterminate without more information. Assuming that country I is operating in the “elastic” portion of its offer curve, the increased willingness to trade by I will lead to an expansion of both its exports and imports (if country II is operating on the “elastic” portion of II’s curve) and to an expansion of I’s exports and a contraction of I’s imports (if country II is operating on the “inelastic” portion of II’s
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This note was uploaded on 10/24/2010 for the course ECON 460 taught by Professor Staff during the Fall '08 term at UNC.

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Chap007EndofChapterproblems - Chapter 07 - Offer Curves and...

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