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V.I.D. - similar to A —if their rises the value of what...

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V. I. D. Terms of Trade 1. Relative Price of U.S. Goods—Our Terms of Trade Countries specialize in producing different goods based on a variety of factors that give then a comparative advantage in the production of those goods Let P denote the price of goods that we specialize in producing (goods that we export or at least do not import from other countries). Let f P denote the price of goods that we import (e.g. oil) The relative price of our exports relative to our imports, P / f P , is called the terms of trade . The terms of trade tells you how many imports you can buy for every export that you sell. The higher is the terms of trade the more valuable is our production and the higher is how real income. Note that P / f P affects the relative productivity production in a way
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Unformatted text preview: similar to A —if their rises the value of what is produced in the U.S. goes up. This is one way to see that a higher relative price of oil (i.e. a decrease in P / f P ) works just like a negative shock to A in the U.S. . 2. Terms of Trade Shocks and the Trade/Current Account Balance Based on the analogy we just established between P / f P and A , they should have similar effects on the trade/current account balance over the business cycle. 3. The Relative Price of Oil and Oil-Exporters Current Account Balance For temporary spikes in the relative price of oil, the saving eff ect should dominate, producing trade surpluses for exporters and trade deficits for importers. Table 17.1...
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