Homework 3 - Illustrate and carefully explain why under...

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ECON 460 – 001, 002 Homework 3 due on February 7, 2011 (Please keep a copy of your answers for studying for test 1) 1. There is no need to draw graphs for this question: (10 points) a. In the neo-classical model, what is the main basis for trade? b. If the home country has a comparative advantage in good Y, what is the relationship between the relative price of good X in the two countries? 2. Suppose that two countries (Country I and Country II) have identical increasing-opportunity- costs production-possibilities frontiers (PPFs). Illustrate and carefully explain why, under certain conditions, the two countries can have an incentive to trade with each other. (30 points) 3. Suppose that two countries, in a situation where they each have an increasing-opportunity- costs production-possibilities frontier (PPF), have identical tastes and preferences (demands).
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Unformatted text preview: Illustrate and carefully explain why, under certain conditions, the two countries can have an incentive to trade with each other. Why can they gain from trade? (30 points) 4. a. Draw offer curves for a two country-two good case to show a point of excess demand for good Y using the relative price line. Is the relative price of X higher or lower than the TOT? (10 points) b. In a separate graph, show how the TOT is affected if there is an increase in demand for good X in country I with everything else remaining constant. (10 points) c. If the income effect or the terms-of-trade effect is strong and dominant, how will a country respond when its TOT rises? Explain using a graph. (10 points)...
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