- Printed in the United States of America.. - Appendix II: Tariffs and Import Quotas in the Presence. - r Contents XV Money and the Exchange Rate in the Long Run 376. - t I 5 Price Levels and the Exchange Rate in the Long Run 388. - Appendix I: Equilibrium in the Foreign Exchange. - The Place of This Book in the Economics Curriculum. - and the causes and effects of central bank intervention in the foreign exchange market.. - We draw on the results of this analysis in the book's. - In the first half of the 1990s several major free-trade agreements were negotiated. - both in Latin America and in the rapidly growing economies of Asia. - CHAPTER 2 Labor Productivity and Comparative Advantage I I share of the market for winter roses in the United States is being supplied by imports. - Wages in the cheese sector will be higher if P C IP W. - wages in the wine sector will be higher if P C IP W <. - it will specialize in the production of wine if P C IP W <. - What is the significance of the number a LC la LW l We saw in the previous section that it is the opportunity cost of cheese in terms of wine. - it will specialize in the production of wine if the relative price of cheese is less than its opportunity cost.. - In the absence of international trade, Home would have to produce both goods for itself.. - In the absence of trade the relative prices of cheese and wine in each country would be determined by the relative unit labor requirements. - In the absence of trade, consumption possibilities are the same as production possibilities (the solid lines P F and P*F* in Figure 2-4). - Determining the Relative Wage in the Multigood Model. - where the relative demand shifts abrupt- ly because of shifts in the pattern of specialization. - As shown in the figure, these "flats". - so in the absence of transport costs Home imports dates. - But in the automobile and auto parts industries Japanese productivity. - In the absence of trade, what would the price of apples in terms of bananas be?. - That is, they can be used only in the production of particular goods.. - Assumptions of the Model. - So how specific are the factors of production in the real economy?. - Both quantities are measured in the reverse of the usual direction. - The marginal product of labor in the manufactures sector, equal to the slope of the production function shown in Figure 3-1, is lower the more labor the sector employs.. - This is the demand curve for labor in the manufacturing sector. - Figure 3-5 I Production in the Specific Factors Model. - 3-6 An EquaT Proportional Increase in the Prices of Manufactures and Food. - Figure 3-7J A Rise in the Price of Manufactures. - First, although the wage rate rises, it rises by less than the increase in the price of manufactures.. - The effect of a rise in the relative price of manufactures can also be seen directly by looking at the production possibility curve. - Food output falls and manufactures output rises as a result of the rise in the relative price of manufactures.. - The Response of Output to a Change in the Relative Price of Manufactures. - Look again at Figure 3-7, which shows the effect of a rise in the price of manufactures.. - ternational Trade in the Specific Factors Model. - For trade to take place, the two countries must differ in the relative price of manufactures that would prevail in the absence of trade. - Consider what would happen if one of the countries experienced an increase in the supply of some resource. - We therefore conclude that an increase in the supply of capital would shift the relative supply curve to the right.. - The world relative supply of manufactures (RS WOKLD ) lies between the relative supplies in the two countries. - choice of production given the relative price of manufactures, shown in the figure as point 1.. - how changes in the relative price of manufactures affect the real incomes of different factors of production. - We are assuming that in the absence of trade Japan would have had a lower relative price of manufactures than the rest of the world. - Thus the consumption of the economy in the absence of trade would have to be a point on the production possibility frontier. - sugar in the U.S. - market was about twice its price in the world market. - Nonetheless, in the actual politics of trade policy income distribution is of crucial importance. - In the food sector, the real wage rises from (w/P F. - their purchasing power is further increased by the rise in the price of manufactures relative to food. - they are made still worse off because of the rise in the relative price of manufactures.. - 'The optimal choice of the land-labor ratio is explored at greater length in the appendix to this chapter.. - If the relative price of cloth rises to (P c /P F ) 2 ,the wage-rental ratio must rise to (w/r) 2 .This will cause the land-labor ratio used in the production of both goods to rise.. - j | H Figure 4-6 An Increase in the Supply of Land. - That is, in the absence of trade the relative price of cloth would be lower in Home than in Foreign.. - A rise in the price of cloth raises the. - A rise in the price of food has the reverse effect. - and (3) trade actually equalizes the prices of goods in the two countries.. - In the real world, prices of goods are not fully equalized by international trade. - Implications of the Tests. - An influential tract that argues that the increasing integration of the United States in the world economy is widening the gap between skilled and unskilled workers.. - Finally, now, consider the effects of a rise in the price of cloth on the wage-rental ratio.. - Figure 4A-4 A Rise in the Price of Cloth. - The changing pattern of trade has differ- ential effects on different groups in the United States. - Thus, as we might expect, a rise in the relative price of cloth leads the economy to produce more cloth and less food. - How an Increase in the Relative Price of Cloth Affects Relative Supply. - Figure 5-3 Production, Consumption, and Trade in the Standard Model. - Figure 5-4 Effects of a Rise in the Relative Price of Cloth. - This is the case shown in the figure.. - The Welfare Effect of Changes in the Terms of Trade. - This shift results in a decrease in the relative price of cloth from (P C IP F ) X to (P C /P F ) 2 , a worsening of Home's terms of trade and an improvement in Foreign's terms of trade.. - Growth that disproportionately expands a country's production possibilities in the direction of the good it exports (cloth in Home, food in Foreign) is export-biased growth. - Is growth in the rest of the world good or bad for our country?. - The main reason for the improvement was a decline in the price of oil. - The shift in the RD curve (if it occurs) is the only effect of a transfer of income. - A transfer of income from the United States to the rest of the world lowers the demand for nontraded goods in the United States, releasing resources that can be used to produce U.S. - Is it still true in this case that a rise in the terms of trade increases welfare? Analyze graphically.. - Show that an improvement in the terms of trade benefits this economy, as well.. - A war in the Middle East disrupts oil supply.. - Technology is the same in the two countries. - What happens to the terms of trade? What about welfare in the two countries?. - Foreign's offer curve OF may be traced out in the same way (Figure 5A-3). - We therefore conclude that average cost depends on the size of the market and the number of firms in the industry:. - Meanwhile, the price the typical firm charges also depends on the number of firms in the industry. - This means that n 2 is the equilibrium number of firms in the industry and P 2 the equilibrium price. - An increase in the size of the market allows each firm, other things equal, to produce more and thus have lower average cost. - Figure 6-4 uses this information to show the effect of an increase in the size of the market on long-run equilibrium. - gure 6-5 I Equilibrium in the Automobile Market. - In the absence of trade, each firm's monopoly would be uncontested.. - Even more peculiarly, there will be two-way trade in the same product. - In the monopolistic competition model of trade it is presumed that the economies of scale that give rise to international trade occur at the level of the individual firm. - Wage Convergence in the Age of Mass Migration. - As documented in the case study on the U.S. - The pattern of international borrowing and lending in the 1970s illustrates the point.. - In the light of our model, this is not surprising. - and hence her wage rate—will be lower than it would have been in the absence of the capital movement. - firms could produce in the United States and export to the European market
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