Suppose country X partially specializes in the production of only two goods, food and clothing. At the initial free trade equilibrium, the country produced 40 units of food and 20 units of clothing. At the same time10 units of food were exported and 10 units of clothing were imported by country X. Now suppose a technological innovation in country X leads to a balanced growth while leaving the relative prices of food and clothing unchanged in the international market. Production of food in country X rises to 50 units and that of clothing rises to 25 units. If consumption of food rises to 42 units, the consumption of clothing:

Question

Quizplus · Accepted Answer

Before the technological innovation, country X was producing 40 units of food and 20 units of clothing, while exporting 10 units of food and importing 10 units of clothing. This means that the country was consuming 30 units of food and 30 units of clothing.

After the innovation, country X is producing more of both goods, with 50 units of food and 25 units of clothing. However, the relative prices of the goods have not changed, so we can assume that the terms of trade remain the same. This means that country X can still trade 10 units of food for 10 units of clothing.

If consumption of food rises to 42 units, then country X must import 12 units of food to make up the difference. Since the terms of trade have not changed, this means that the country must also export 12 units of clothing.

Therefore, the consumption of clothing must rise from 30 (20 produced + 10 imported) to 33 units (25 produced - 12 exported + 20 originally consumed). The answer is choice A.

Suppose Country X Partially Specializes in the Production of Only