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Working group 6 17-10-2019Question 1 (chapter 6, problem 5b, d, e)
b. DR goes up, DA goes down the demand curve will shift to the left. It hurts the Netherlands
Relatively less demand for agricultural products. Lower relative price and lower relative quantity of
agricultural products.
d. supply will decrease of SR, SA goes up the supply curve will shift to the right. It hurts the
Netherlands
Relatively more supply of agricultural products. The relative price will drop. Demand will change as a
reaction on this change. It is just the price that changes, there is a change over de RD curve.
e. with an import tariff, PA/PR goes down because PR goes up. If the price of raw materials is higher,
the supply will increase. SR goes up, SA will go down. DR goes down because of the higher price. This
import tariff is good, because your terms of trade will increase: a higher equilibrium.
Relatively less demand for raw materials, thus more demand for agricultural products. Given the rise
in the price of the agricultural product, the exporters of the agricultural products are better of after
the price increase.
, Question 2 (chapter 6)
From an economic point of view, India and China are somewhat similar. Both are huge, low-wage
countries, probably with similar patterns of comparative advantage, which until recently were
relatively closed to international trade. China was the first to open up. Now that India is also opening
up to world trade, how would you expect this to affect the welfare of China? Of the United States?
(Hint: Think of adding a new economy identical to that of China to the world economy.)
Answer:
Because there is more supply on the market, China is not happy with India opening up to world
trade. The US is happy with this because they can import cheaper because of larger supply in the
world market.
Because we can see the supply curve of China and India as the same, the world supply curve would
shift even more to the supply curve of China + India.
Terms of trade for USA will increase.
E and I can also be good 1 and good 2 respectively.
If the world relative price of good 1 actually increase, they will specialize in producing good 1. The
steeper the line (the red line is the steepest), the more specialization in good 1.
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