Change from the initial equilibrium to new equilibrium

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Reference no: EM131212423

A country is initially in a free-trade equilibrium, in which it is producing 40 units of wheat and 64 units of cloth. The country exports cloth and imports wheat. Growth now occurs in the country's production capabilities. If product prices are unchanged, the country will shift to producing 50 units of wheat and 80 units of cloth.

a. What kind of growth is this?

b. The growth of the country actually causes a change in product prices. In the new free-trade equilibrium, the country actually produces 52 units of wheat and 77 units of cloth. Explain what has happened to result in the change from the initial equilibrium to this new equilibrium.

Reference no: EM131212423

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