Note that the slope of tt lies somewhere between the

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Unformatted text preview: are producing, and hence consuming at, respectively, points a’ and a in Figure 2. The slope of tangents drawn at points a and a’ show the rate at which manufacturing and mining must be traded off against each other should one or the other increase in autarky. Assume trade between the two countries now becomes possible at an exchange ratio given by the slope of TT. Note that the slope of TT lies somewhere between the slope of the tangents at, respectively, points a and a’, the autarky exchange ratios. In China, more mining exchanges for a unit of manufacturing on the world market relative to autarky. In effect, the relative price of manufacturing has increased relative to autarky (note that in autarky, China’s comparative advantage in manufacturing implies a relative price for manufacturing below the world price). As a consequence, there is an incentive to transfer resources from mining into manufacturing, shown by the movement from a to b in Figure 2. The slope of TT also implies that in Australia, less mining exchanges for a unit of manufacturing on the world market relative to autarky. In effect, the relative price of manufacturing has decreased relative to autarky (or, the relative price of mining has increased relative to autarky ‐ note that in autarky, Australia’s comparative disadvantage in manufacturing implies a relative price for...
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This document was uploaded on 03/28/2014 for the course ECON 10003 at University of Melbourne.

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