4. Now consider country F in this model to be a small country. Suppose the amount of labor in country Fincreases.i. How does it affect the terms of trade of country F?ii. How does it affect the terms of trade of country H?iii. How does it affect the welfare of country F?iv. How does it affect the welfare of country H?
Question
- Now consider country F in this model to be a small country. Suppose the amount of labor in country Fincreases.i. How does it affect the terms of trade of country F?ii. How does it affect the terms of trade of country H?iii. How does it affect the welfare of country F?iv. How does it affect the welfare of country H?
Solution
i. Effect on Terms of Trade for Country F: In a small country like F, an increase in labor will increase the production of Good B (which is labor-intensive). However, because F is a small country, its increased production is unlikely to significantly affect the world price of Good B. Therefore, the terms of trade for country F (the amount of Good A it gets for each unit of Good B) is likely to remain unchanged.
ii. Effect on Terms of Trade for Country H: Since the increase in labor in country F does not significantly affect the world price of Good B, the terms of trade for country H (the amount of Good B it gets for each unit of Good A) is also likely to remain unchanged.
iii. Effect on Welfare of Country F: The welfare effect on country F is likely to be positive. It can produce and consume more of Good B due to the increase in labor. Since the terms of trade do not change significantly, it can still get the same amount of Good A for each unit of Good B it exports. This increases the welfare of country F.
iv. Effect on Welfare of Country H: For country H, the welfare effect is likely to be neutral. It can still import Good B at the same price, which allows it to consume the same amount of both goods. Therefore, the welfare of country H does not change significantly.
Similar Questions
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5) Suppose that a "small country" experiences growth strongly biased toward its export, clothA) this will tend to worsen the country's terms of trade.B) this will tend to improve the country's terms of trade.C) this will tend to worsen terms of trade for the country's trading partner.D) this will tend to improve terms of trade for the country's trading partner.E) this will have no effect on terms of trade for the country's trading partner
Assume two countries: H and F. Each country produces two goods, A and B. Good A is relatively capitalintensive and country F is relatively labor abundant. Consider H and F to be large economies.1. Suppose the amount of labor in country F increases. Using a diagram show how the PPF and theproduction point of country F change.2. Suppose the amount of labor in country F increases.i. Using a diagram show how the world relative supply for good B and the world relative price ofgood B changes.ii. How does it affect the terms of trade of country F?iii. How does it affect the terms of trade of country H?iv. How does it affect the welfare of country F?v. How does it affect the welfare of country H?
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6) Suppose that a country experiences growth strongly biased toward its export, clothA) this will tend to worsen the country's terms of trade.B) this will tend to improve the country's terms of trade.C) this will tend to leave the country's terms of trade unchanged.D) this will tend to worsen the terms of trade for the country's trading partner.E) this will increase the price of cloth relative to the imported good.
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