Question 1

When Spain and Portugal joined the European Community (EC) in 1986, the United States feared that a result of this change might be a shift in demand for agricultural products by Spain and Portugal away from the United States and toward other Community members. In response, the United States threatened to impose stiff tariffs on a variety of exports of the rest of the EC to the United States. Using offer curve diagrams for (a) the United States and Spain/ Portugal, (b) Spain/Portugal and the rest of the EC, and (c) the United States and the rest of the EC, illustrate and explain the effects of these potential events on the terms of trade and volume of trade for the various economic units.

Accepted Answer

The potential entry of Spain and Portugal into the European Community (EC) in 1986 raised concerns for the United States regarding a potential shift in demand for agricultural products. In response, the United States threatened to impose stiff tariffs on a variety of exports from the rest of the EC to the United States.

(a) The offer curve diagram for the United States and Spain/Portugal would show a potential decrease in demand for agricultural products from the United States, leading to a shift in the offer curve to the left. This would result in a decrease in the terms of trade for the United States and a decrease in the volume of trade between the United States and Spain/Portugal.

(b) The offer curve diagram for Spain/Portugal and the rest of the EC would show a potential increase in demand for agricultural products from other EC members, leading to a shift in the offer curve to the right. This would result in an increase in the terms of trade for Spain/Portugal and an increase in the volume of trade between Spain/Portugal and the rest of the EC.

(c) The offer curve diagram for the United States and the rest of the EC would show a potential decrease in demand for agricultural products from the United States, leading to a shift in the offer curve to the left. This would result in a decrease in the terms of trade for the United States and a decrease in the volume of trade between the United States and the rest of the EC.

Overall, the potential events would lead to a decrease in the terms of trade for the United States and an increase in the terms of trade for Spain/Portugal and the rest of the EC. The volume of trade would decrease between the United States and Spain/Portugal, and the rest of the EC, while increasing between Spain/Portugal and the rest of the EC.

Question 2

(a) Define the concept of a country's (call it country A's) offer curve. Will this curve always be upward-sloping? Briefly, why or why not?
(b) Put country A's offer curve together with the offer curve of a trading partner country (call it country B) and indicate the equilibrium position. Then suppose that, from this equilibrium position, country A's consumers now change their tastes toward wanting relatively more of A's export good at the same time that country B reduces its tariff on A's export good. Explain the impact of each event separately on the volume of trade of each good and on the terms of trade. Then indicate whether it is possible to assess, when the new equilibrium position is attained, the net results of the two shifts together on the volume of trade of each good and on the terms of trade (in comparison with the initial equilibrium). (Assume that the offer curves are "elastic" throughout.)

Accepted Answer

(a) The concept of a country's offer curve refers to the relationship between the price of a country's export good and the quantity of that good that the country is willing and able to export. This curve shows the various combinations of price and quantity that the country is willing to export at, given its production capacity and the prices of its import goods. The offer curve will not always be upward-sloping, as it depends on the elasticity of supply and demand for the export good. If the supply of the export good is relatively elastic (responsive to price changes), the offer curve may be upward-sloping. However, if the supply is relatively inelastic, the offer curve may be horizontal or even downward-sloping.

(b) When country A's offer curve is put together with country B's offer curve, the equilibrium position is determined by the point where the two offer curves intersect. This point represents the quantity of trade that will occur between the two countries at a certain price.

If country A's consumers change their tastes toward wanting relatively more of A's export good, this will shift country A's offer curve outward, leading to an increase in the volume of trade of the export good and a decrease in the volume of trade of the import good. This will also lead to an improvement in the terms of trade for country A.

If country B reduces its tariff on A's export good, this will also shift country A's offer curve outward, leading to an increase in the volume of trade of the export good and a decrease in the volume of trade of the import good. This will also lead to an improvement in the terms of trade for country A.

When the new equilibrium position is attained, it is possible to assess the net results of the two shifts together on the volume of trade of each good and on the terms of trade. The volume of trade of the export good will increase, while the volume of trade of the import good will decrease. The terms of trade will also improve for country A, as the price of its export good will increase relative to the price of its import good.

Question 3

"If we observe that a home country's volume and terms of trade are both movingin the same direction (i.e., either both increasing or both decreasing), then we can surmise that the home country's offer curve is shifting. However, if we observe that the home country's volume and terms of trade are moving in opposite directions (i.e., one is increasing and the other is decreasing), then we can surmise that the foreign offer curve is shifting." Is this statement correct or incorrect? Illustrate and explain your answer. (Assume "elastic" offer curves throughout.)

Accepted Answer

This statement is incorrect. The movement of a home country's volume and terms of trade in the same or opposite directions does not necessarily indicate a shift in the offer curve of either the home country or the foreign country.

The offer curve represents the various combinations of goods that a country is willing to trade at different terms of trade. It is determined by the country's production possibilities and preferences. In the case of elastic offer curves, the country is willing to trade a wide range of quantities at different terms of trade.

When both the volume and terms of trade of the home country are moving in the same direction, it simply means that the country is trading more or less of its goods at better or worse terms of trade. This does not necessarily indicate a shift in the offer curve. It could be due to changes in demand, changes in production, or changes in the terms of trade set by the foreign country.

Similarly, when the volume and terms of trade are moving in opposite directions, it does not necessarily indicate a shift in the foreign offer curve. It could be due to changes in the foreign country's demand, production, or terms of trade set by the home country.

In conclusion, the movement of a home country's volume and terms of trade does not directly indicate a shift in the offer curve. Other factors need to be considered to determine if there has been a shift in the offer curve of either the home country or the foreign country.

Question 4

The "income terms of trade" index would be calculated by which one of the following formulas (where P_X = price index of exports, P_M = price index of imports, Q_X = quantity index of exports, and Q_M = quantity index of imports)?

Accepted Answer

The income terms of trade index measures the ratio of the value of exports to the value of imports. Income Terms of Trade = (P_X x Q_X) / (P_M x Q_M) Option C is the correct formula that calculates the income terms of trade index.

Question 5

(a) Define the theoretical concept of a country's "offer curve" (or "reciprocal demand curve"). Then, using a numerical example, construct three points on a country's offer curve, assuming that the country (call it "country A") exports wheat and imports clothing.
(b) Put the offer curve of country A [you do not need to use your specific numbers from part (a) of this question in this part (b)] together with the offer curve of trading partner country B. Explain how the equilibrium position is attained if the countries initially are in a situation that is not a position of equilibrium. (You can assume that the countries are always operating in the "elastic" portions of their offer curves.)
(c) Finally, suppose that country B's consumers change their tastes so that they now have greater preference for country A's export good than they did previously. Illustrate and carefully explain the movement from the old equilibrium position to the new equilibrium position because of this change in tastes, assuming other things equal. Be sure to include an indication of the impact on country A's terms of trade and volume of trade.

Accepted Answer

The answer of (a) Define the theoretical concept of a...

Question 6

Given the following table showing possible terms of trade for country I and country I's corresponding demand for imports of good Y at each terms of trade:
$\begin{array}{cl}
&&&\begin{array}{c}
\text { possible terms } \
\text { of trade }
\end{array} & \begin{array}{c}
\text { I's quantity demanded } \
\text { of imports of Y }
\end{array} \
\hline
\end{array}$

A) $\quad $$\quad $$1 X: 1 Y \text { or } P_{X} / P_{Y}=1 \quad \quad \quad 20 \text { units }$

B) $\quad $$\quad $$1 \mathrm{X}: 2 \mathrm{Y} \text { or } \mathrm{P}_{\mathrm{X}} / \mathrm{P}_{\mathrm{Y}}=2 \quad \quad \quad 46 \text { units }$

C)$\quad $$\quad $ $1 X: 3 Y \text { or } P_{X} / P_{Y}=3 \quad\quad\quad 69 \text { units }$

D)$\quad $$\quad $$1 X: 4 Y \text { or } P_{X} / P_{Y}=4 \quad\quad\quad 84 \text { units }$
Calculate the supply of exports of good X by country I at each terms of trade and plot the resulting offer curve.  What is the nature of the elasticity of demand for imports between [i] points (a) and (b); [ii] points (b) and (c); and [iii] points (c) and (d)?  How do you know?  What might account for these respective elasticities?

Accepted Answer

The answer of Given the following table showing possible terms...

Question 7

In the following partially-completed table showing country I's demand for import good Y and supply of export good X at various terms of trade,
$\begin{array} { c c c } 
\text { TOT } & \text { Y demanded } & \text { supplied } \
& & \
\hline4 \mathrm { Y } : 1 \mathrm { X } & 400 \mathrm { Y } & 100 \mathrm { X } \
3 \mathrm { Y } : 1 \mathrm { X } & \mathrm { v } & 120 \mathrm { X } \
2 \mathrm { Y } : 1 \mathrm { X } & 300 \mathrm { Y } & \mathrm { w }
\end{array}$

Accepted Answer

The table shows a relationship between the terms of trade (TOT) and the demand/supply of goods Y and X. As the TOT decreases from 4Y:1X to 3Y:1X, we expect the quantity of Y demanded to increase due to the lower relative price of imports. Similarly, as the TOT further decreases to 2Y:1X, the quantity of X supplied increases due to the higher relative price of exports. Choice B correctly reflects this economic principle, showing an increase in both Y demanded and X supplied as the TOT becomes more favorable for country I.

Question 8

Suppose that country I is importing good Y and exporting good X. At a terms of trade of 1X:4Y, country I is willing to import 60 units of Y and to export 15 units of X in exchange; at a terms of trade of 1X:5Y, country I is willing to import 70 units of Y and to export 14 units of X in exchange. Considering just these two offer curve points, country I's demand for imports between the two points is __________.

Accepted Answer

The answer of Suppose that country I is importing good...

Question 9

In the graph in Question #19 above, suppose that, when trade is taking place at the equilibrium position, consumers in France now change tastes and shift their demand more toward clothing and away from wine. This change in tastes would

Accepted Answer

A shift or pivot of France's offer curve downward and to the right reflects an increased willingness to trade wine for clothing, consistent with a shift in consumer preferences toward clothing and away from wine.

Question 10

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country A's offer curve to the right?

Accepted Answer

A tariff reduction by A on B's products makes B's products cheaper in A, increasing A's demand for B's products and thus increasing A's willingness to trade, shifting A's offer curve to the right.

Question 11

Suppose that a home country is contemplating the imposition of a tariff in order to improve its terms of trade by a given amount. How would the decision as to the size of the tariff to impose depend on the elasticity of the foreign country's offer curve? Explain.

Accepted Answer

The answer of Suppose that a home country is contemplating...

Question 12

In the following offer curve diagram, At TOT₁, there is excess demand for __________, and the movement to equilibrium will result in better terms of trade for __________.

Accepted Answer

The answer of In the following offer curve diagram, At TOT₁,...

Question 13

Suppose that, from an initial equilibrium position in the offer curve diagram, country I imposes a tariff on country II's export good at the same time that consumers in country II change their tastes toward wanting more of II's export good. Illustrate and explain the impact of these two simultaneous events on country I's volume and terms of trade. (Assume that both countries' offer curves are "elastic" throughout.)

Accepted Answer

The answer of Suppose that, from an initial equilibrium position...

Question 14

In deriving an offer curve for a country, if a higher price of exports/price of imports leads to a reduction in the quantity of exports which the country is willing to supply, then, in this range of the offer curve, the offer curve is said to be __________.

Accepted Answer

The offer curve is said to be inelastic in this range because a higher price of exports relative to imports leads to a reduction in the quantity of exports the country is willing to supply, indicating that the country's response in terms of export quantity is less than proportional to the change in price, which is characteristic of inelastic behavior.

Question 15

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country B's offer curve downward (or to the right)?

Accepted Answer

The answer of In an offer curve graph with country...

Question 16

Suppose that country I is importing good Y and exporting good X. At a terms of trade of 1X:4Y, country I is willing to import 60 units of Y and to export 15 units of X in exchange; at a terms of trade of 1X:5Y, country I is willing to import 75 units of Y and to export 15 units of X in exchange. Considering just these two offer curve points, country I's demand for imports between the two points is __________.

Accepted Answer

The answer of Suppose that country I is importing good...

Question 17

In an offer curve diagram with country A's export good (country B's import good) on the horizontal axis and country B's export good (country A's import good) on the vertical axis, which one of the following events will shift or pivot country B's offer curve upward (or to the left)?

Accepted Answer

If there is a change in preferences/tastes of B's consumers towards wanting more of A's export good and less of B's export good, it will increase the demand for A's export good in country B. This will lead to an increase in the price of A's export good in B, causing the offer curve of B to shift upward/to the left in the offer curve diagram. Hence, the correct answer is D.

Question 18

Given the following indexes for country I in 2012, with 2005 = 100:
$\begin{array} { l l } 
\text { price of exports } = 112 & \text { quantity of exports } = 94 \
\text { price of imports } = 108 & \text { quantity of imports } = 102
\end{array}$
(a) Calculate country I's net barter or commodity terms of trade for 2012 (round to nearest one decimal place if necessary)..
(b) Calculate country I's income terms of trade for 2012 (round to nearest one decimal place if necessary)..
(c) Explain your differing results for (a) and (b) and briefly explain the significance of each terms-of-trade movement for country I.

Accepted Answer

The answer of Given the following indexes for country I...

Question 19

If country I is trading in the inelastic range of country II's offer curve, then the imposition of a tariff by country I, which still leaves country I in the inelastic range of country II's curve, will (assuming no retaliation) lead to __________ in country I's terms of trade and to __________ in the volume of imports of country I.

Accepted Answer

The answer of If country I is trading in the...

Question 20

(a) Define the "offer curve" (or "reciprocal demand curve") of a country. If an offer curve is drawn as an upward-sloping curve, what is being assumed about the value of thecountry's elasticity of demand for imports and why does this assumption yield the upward-sloping curve?
(b) Using the usual two-good, two-country offer-curve diagram, identify the equilibrium position and state why the position is one of equilibrium. Then suppose that, from this initial equilibrium position, one country now experiences an increase in productivity in its export industry at the same time that the other country imposes an import tariff. Illustrate and explain the combined or overall impact of these two events on the equilibrium terms of trade and on the quantity traded of each of the two goods. If a combined impact is uncertain, briefly indicate why it is uncertain.

Accepted Answer

The answer of (a) Define the "offer curve" (or "reciprocal...

Quiz 7: Offer Curves and the Terms of Trade

The "income terms of trade" index would be calculated by which one of the following formulas (where P_X = price index of exports, P_M = price index of imports, Q_X = quantity index of exports, and Q_M = quantity index of imports) ?

In the graph in Question #19 above, suppose that, when trade is taking place at the equilibrium position, consumers in France now change tastes and shift their demand more toward clothing and away from wine. This change in tastes would

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country A's offer curve to the right?

Suppose that a home country is contemplating the imposition of a tariff in order to improve its terms of trade by a given amount. How would the decision as to the size of the tariff to impose depend on the elasticity of the foreign country's offer curve? Explain.

In the following offer curve diagram, At TOT₁, there is excess demand for , and the movement to equilibrium will result in better terms of trade for .

In deriving an offer curve for a country, if a higher price of exports/price of imports leads to a reduction in the quantity of exports which the country is willing to supply, then, in this range of the offer curve, the offer curve is said to be __________.

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country B's offer curve downward (or to the right) ?

In an offer curve diagram with country A's export good (country B's import good) on the horizontal axis and country B's export good (country A's import good) on the vertical axis, which one of the following events will shift or pivot country B's offer curve upward (or to the left) ?

Quiz 7: Offer Curves and the Terms of Trade

The "income terms of trade" index would be calculated by which one of the following formulas (where PX = price index of exports, PM = price index of imports, QX = quantity index of exports, and QM = quantity index of imports) ?

In the graph in Question #19 above, suppose that, when trade is taking place at the equilibrium position, consumers in France now change tastes and shift their demand more toward clothing and away from wine. This change in tastes would

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country A's offer curve to the right?

Suppose that a home country is contemplating the imposition of a tariff in order to improve its terms of trade by a given amount. How would the decision as to the size of the tariff to impose depend on the elasticity of the foreign country's offer curve? Explain.

In the following offer curve diagram, At TOT1, there is excess demand for __________, and the movement to equilibrium will result in better terms of trade for __________.

In deriving an offer curve for a country, if a higher price of exports/price of imports leads to a reduction in the quantity of exports which the country is willing to supply, then, in this range of the offer curve, the offer curve is said to be __________.

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country B's offer curve downward (or to the right) ?

In an offer curve diagram with country A's export good (country B's import good) on the horizontal axis and country B's export good (country A's import good) on the vertical axis, which one of the following events will shift or pivot country B's offer curve upward (or to the left) ?

The "income terms of trade" index would be calculated by which one of the following formulas (where P_X = price index of exports, P_M = price index of imports, Q_X = quantity index of exports, and Q_M = quantity index of imports) ?

In the following offer curve diagram, At TOT₁, there is excess demand for , and the movement to equilibrium will result in better terms of trade for .