Country A and Country B have identical Production Possibility Curves, but due to
ID: 1168151 • Letter: C
Question
Country A and Country B have identical Production Possibility Curves, but due to taste differences, the countries produce at different points on the PPCs. Country A loves good Y, so it produces and consumes more of it in autarky. Country B loves good X, so it produces and consumes more of it in autarky. Show that these two countries can still gain from trade.
Redraw these two graphs and show a possible trade equilibrium between these two countries.
(1) Draw and label possible price lines after trade.
(2) Identify post-trade production points in both countries.
(3) Identify post-trade consumption points in both countries..
(4) Identify exports of both countries.
(5) Identify imports of both countries.
(6) Identify the trade triangles of both countries.
a. A small country experiencing a balanced growth.
b. A large country experiencing a balanced growth.
c. A small country experiencing growth biased toward cloth production.
d. The immiserizing growth effect.
3. Consider the following graph. The country's resources have grown over time and production has shifted from S1 to S6. the graph shows that after growth occurs:
Select one:
a. The country exports more and imports less because the terms of trade of the country falls.
b. The country exports more and imports less because the terms of trade of the country rises.
c. The country exports less and imports more because the terms of trade of the country rises.
d. The country exports less and imports more because the terms of trade of the country falls.
Explanation / Answer
After trade, a point will be reached between the original production points of both countries thereby benefitting both the countries. (c) A small country experiencing growth biased toward cloth production. The country exports more and imports less because the terms of trade of the country rises.