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ECONOMICS HOMEWORK – 1.MARCH 2010

Q. 10 p. 140

A free trade equilibrium exists in a two region, two product world. The United States exports food and imports clothing. A long term drought now occurs in East Asia.
a) What is the effect on East Asia’s willingness to trade?

East Asia will be more eager to trade as they are most likely exporting clothing and importing food, and as there is a drought they are in large demand of food. The imports with the United States will increase in demand.

b) Assuming that each region is large enough to influence international prices, how does East Asia’s drought affect equilibrium international price ratio?

East Asia’s demand for food increases, therefore increasing the price from the exporting country. However they have large influences on the clothing exports as most production markets are coming from Asia. Therefore if they have to pay more for food because they are in greater need, they can choose to lift prices for their clothing exported to the United States, shifting the equilibrium point.

c) Which group in the United States is likely to gain real income in the long run as a result of all this? Which group in the US is likely to lose real income?

Because Asia’s demand for food is very high, this is the group in which the US will gain real income. Clothing is not one they will gain in because Asia produces their own clothing and exports it to other countries and therefore are in no need for it from the US.

Q. 12 p. 140

Continue the scenario of question 11 – the new process in the US and the resulting change in the international equilibrium price ratio. Focus now on effects in the rest of the world.

a) The rest of the world trading with Asia will increase in food productions, and lower clothing manufacturing

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