Ch. 3 Problems

Ch. 3 Problems - Suppose that home and foreign countries...

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Chapter 3 Problems reviewed in class: 1 and 3
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Problem 1 Figure 3.3 illustrates immiserizing export- biased growth. Construct a diagram that illustrates the possibility that a country may suffer welfare loss when growth (at initial terms of trade) results in a balanced increase in food and clothing outputs. Can such immiserization accompany import- biased growth (i.e., growth concentrated in food the import-competing sector)?
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Problem 1 Answer Initially, production will be at E and consumption at A. Growth proportional to the initial volume of production will lead to a decline in the world relative price of clothing if the income elasticity of food is greater than that for clothing. In this case the relative demand for clothing falls. If the decline is large enough, consumption may shift to a point like, A , which represents a lower welfare level than at A. With import-biased growth, the relative price of clothing rises.
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Problem 3
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Unformatted text preview: Suppose that home and foreign countries taste patterns differ but each are inflexible: food to clothing consumption ratio at home is 2:1 (at any prices) and the same ratio is 1:1 for foreign. Both countries have identical bowed-out transformation curves (PPFs). What happens to home countrys terms of trade if it makes a transfer (T) to the foreign country? Is that burdensome? Problem 3 Answer Before the transfer, the home country imports food. The home country gives T dollars to the foreign country. The foreign country spends T/2 on food and T/2 on clothing. The home country reduces demand for food by 2T/3 units and clothing by T/3 units. Therefore, the world demand for food reduces. The world relative price of food then falls. Since the home country imports food, its terms of trade have improved as a result of the loan. This is a blessing to the home country and the burden of transfer lowers....
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This document was uploaded on 02/10/2012.

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Ch. 3 Problems - Suppose that home and foreign countries...

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