hw4_solutions - Econ 4550/6550 International Trade...

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1 Econ 4550/6550 International Trade Assignment 4/Solutions 1. Let us assume that the terms of trade improve, and thus the relative price of a country's exports increase. This would, logically, lead to a shift away by world consumers to substitute goods. If the demand for a country's exports is elastic, the quantity decrease would be proportionally larger than the per unit price increase. This term of trade effect would actually lower the country's real income and economic welfare. 2. (a) P M /P F RS 1 RS 2 RD (Q M +Q M * )/(Q F +Q F * ) Food supply disruption from South Asia decreases the supply of raw materials, which increases the world relative supply of manufactures. The world relative supply curve shifts out from RS 1 to RS 2 , decreasing the world relative price of manufactured goods, and deteriorating Japan’s TOT. (b) Korea’s increased automobile p roduction increases the supply of manufactures, which increases the world RS. The world relative supply curve shifts out from RS
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hw4_solutions - Econ 4550/6550 International Trade...

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