TradeLecture12

TradeLecture12 - A Standard Model of a Trading Economy Relative Prices Determine the Economys Output How an Increase in PC/PF Affects Relative

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A Standard Model of a Trading Economy Relative Prices Determine the Economy’s Output How an Increase in P C / P F Affects Relative Supply © Ben Zissimos, Vanderbilt University
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A Standard Model of a Trading Economy The Welfare Effect of Changes in the Terms of Trade e define the rms of trade the price of the good a We define the terms of trade as the price of the good a country initially exports divided by the price of the good it initially imports. Then a rise in the terms of trade increases a country’s welfare, while a decline in the terms of trade reduces its elfare welfare. © Ben Zissimos, Vanderbilt University
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A Standard Model of a rading Economy Determining Relative Prices Trading Economy Suppose that the world economy consists of two countries: • Home (which exports cloth) s terms of trade are measured by – Its terms of trade are measured by P C / P F – Its quantities of cloth and food produced are Q C and Q F • Foreign (which exports food) – Its terms of trade are measured by P F / P C – Its quantities of cloth and food produced are Q * C and Q * F © Ben Zissimos, Vanderbilt University
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A Standard Model of a Trading Economy World Relative Supply and Demand RS Relative price of cloth, P C /P F ( P C /P F ) 1 1 RD elative quantity © Ben Zissimos, Vanderbilt University Relative quantity of cloth, Q C + Q * C Q F + Q * F
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A Standard Model of a Trading Economy Economic Growth: A Shift of the RS Curve Is economic growth in other countries good or bad for our
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This note was uploaded on 05/05/2011 for the course CLAS 146 taught by Professor Solomon during the Spring '11 term at Vanderbilt.

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TradeLecture12 - A Standard Model of a Trading Economy Relative Prices Determine the Economys Output How an Increase in PC/PF Affects Relative

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