BA 187: International Trade
Homework #3 Answers:
Gains in the Standard Trade Model
1. “The inability of factors to move from one use to another
will take away any possible gains from trade.”
False
Y
1. In autarky, produce & consume at pt. A1 with utility level U1.
2. Opening trade raises relative price of Good X.
C2
3. Prod’n fixed at point A1 but new consumption at C2 with
higher level of utility, U2. This reflects gains to exchange only.
Prod’n Possibilities
U2
A1
U1
(PX/PY)
1
X
2. “So long as both countries differ in both tastes and
technologies, mutual gains from trade are always possible.”
False
1. Home & Foreign PPF’s and utility functions differ.
2. Autarky Equilibrium at AH and AF
Y
AF
UF
[PX /PY]AF
3. Differences in prod’n and utility offset one another so
relative product prices are the same in both countries.
4. RESULT? No gains from trade, no trade occurs.
AH
PPFF
UH
[PX /PY]AH
PPFH
X
3. Explain why the ROW is becoming Americanized at the
same time as the U.S. is becoming globalized.
1. Assuming identical utility function for Home & Foreign
Y
2. Home & Foreign PPF’s differ due to differences in
technology or factor endowments.
QF
AF
3. Autarky Equilibrium at AH and AF
C*
4. Opening trade changes relative prices
5. New equilib. consumption at common C*.
but each country has different prod’n ;point.
AH
6. RESULT? Countries look more
like one another in consumption.
QH
(PX/PY)
PPFF
PPFH
*
X
4. “Export-oriented growth is an undesirable event from the
point of view of the home country because it reduces our
terms of trade and so lowers our well-being as a nation.”
False
Relative Price of X
Y
PX/PY
PPF1
(PX/PY)
RS0
1
RS1
PPF0
Q1
(PX/PY)
0
(PX/PY)
Q0
RD0
1
(PX/PY)
0
X
Relative Quantity of X
(qX+ q*X)/(qY + q*Y)
4. “Export-oriented growth is an undesirable event from the
point of view of the home country because it reduces our
terms of trade and so lowers our well-being as a nation.”
False
• Export-oriented growth shifts the nation’s PPF out
proportionally more in the direction of its export good X.
• At the original relative price (PX/PY) the relative supply
of Good X increases. See slide from class.
• The result is a lower relative price than before (terms of
trade worsen for Home).
• Combine PPF after growth with lower relative price
allows nation to reach higher level of utility than before
export-oriented growth occurred.
• CONCLUSION? Export-oriented is not undesirable.
Export-oriented growth improves a country’s welfare.