What happens to the volume of trade

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Reference no: EM131210905

In your answer to this question, use a diagram like Figure and start from a no-trade point like S 0 with a no-trade price ratio of 2 W / C. Now trade is opened and the country can trade whatever it wants at an international price ratio of 1 W / C .

(In your answers, you will need to picture additional community indifference curves that exist but are not shown explicitly in Figure 4.3.)

a. Show that the country can gain from trade even if the country does not change its production point. (Production stays at point S 0 .)

b. Show that the country can gain even more from trade if it also adjusts the production point to its optimal position (given the price ratio of 1)

c. What happens to the volume of trade as the country's position shifts from that shown in part a to that shown in part b ?

2146_Indifference Curves and Production Possibilities Without Trade.jpg

Reference no: EM131210905

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