Problem 1•With reference to home country’s trade triangle illustrated in Figure 2.5, suppose the world relative price of clothing stays at the slope shown by line CED. How would the home country’s volume of imports and exports be altered if (a) a fire destroyed 10% of its clothing endowment, or (b) a bumper harvest expanded its food production by 10%?
Textbook Figure 2.5
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Problem 1 Answer•(a) The endowment in Figure 2.5 shifts towards the vertical axis by 10 percent. The country can then trade along a line parallel to CED (as the world prices have not changed). This should lead to decline in both imports and exports (i.e., the trade triangle will be smaller).•(b) Similar analysis as in (a), both imports and exports decrease.