Exam 6: Gains From Trade in Neoclassical Theory

If two countries have identical production-possibilities frontiers but different tastes, it is possible for each country to gain from trade with the other country

Given the diagram below, which shows country A in its autarky position at point E [where the price line labeled p₀ is tangent to both country A's production-possibilities frontier (PPF) and country A's indifference curve S₀]: If country A now is opened to international trade in a situation where the price of bread relative to the price of meat is lower on the world market than it is in A's autarky position, then __________; with international trade, country A will be __________.

(a) Using the neoclassical model, build the case why it is beneficial for a country to movefrom a situation of autarky to a situation of free trade. (b) Briefly, why can the neoclassical model of trade be regarded as "better" in some respects than the Classical model of trade?

Explain, using the PPF-indifference curve diagram, how a change in tastes can cause a country to shift from being an exporter of a good to being an importer of that same good. (Assume that world prices are constant.)

As a country moves from autarky to trade, the relative price of the country's export good Will __________ for home consumers, and the relative price of the country's import good __________ for home consumers.

In the following graph showing indifference curves for country A (a₁) and for country B (b₁) in a situation where both countries have the same production-possibilities frontier, in Autarky, P_X/P_Y in country A is __________ P_X/P_Y in country B, and, if trade begins, ountry A will export good __________.

The text has demonstrated that, even if a country's production does not change with the opening of the country to trade, a gain (the "consumption gain") can still occur even though there is no "production gain." Is the reverse situation possible - that is, can there be a "production gain" without there being a "consumption gain" for the country? Why or why not?

Given the diagram below, in which country A is producing at point P and consuming at point C: Country A is __________, and the ratio of the price of food relative to the price of books [i.e., (P_food/P_books)] reflected by price line P₀ is __________ than the (P_food/P_books) ratio that existed when country A was in autarky.