ec340ch2 (3) - How Trade Occurs As Home exports wheat,...

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How Trade Occurs As Home exports wheat, quantity of wheat sold at Home falls. The price of wheat at Home is bid up. More wheat goes into Foreign’s market. The price of wheat in Foreign falls. As Foreign exports cloth, the quantity sold in Foreign falls, and the price in Foreign for cloth rises. The price of cloth at Home falls. Change in Production and Consumption Home producers of wheat can earn more than the opportunity cost of wheat by selling it to Foreign. Home will therefore shift labor resources toward the production of wheat and increase its production. Remember wages are calculated by the price of the good times its marginal product. Given the information from before, we can calculate the ratio of wages in the two industries. International Trade Trade allows a country to engage in consumption possibilities it did not have before trade. We can see this as Home can now be on a higher indifference curve with
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ec340ch2 (3) - How Trade Occurs As Home exports wheat,...

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