Download Current Issues in International Trade by David Greenaway (eds.) PDF

By David Greenaway (eds.)

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The exogenous fall in the world relative price of its exportable, Y, worsens the economy's terms of trade. Production of Y is discouraged and the production point shifts from A to B, while consumption of Y relative to X is encouraged as consumption shifts from G to H on the lower social indifference curve/'/'. This illustration is familiar from introductory textbooks, but in fact it ignores a whole host of issues. We can perhaps concede that adjustment of demand patterns to changed circumstances is relatively rapid, although even this is a major simplification.

For concreteness, we focus on a particular shock, an increase in computerisation in the traded goods sector, which is assumed to take the form of labour-saving technological progress. 5. The second effect of the shock is to reduce the economy-wide demand for labour at any given w and p, so shifting the LL curve downwards to L'L' as shown. Once again, the transition from the initial equilibrium a' to the new equilibrium b' may take many forms, and the diagram illustrates one of these: the real exchange rate is assumed to adjust rapidly to eliminate incipient disequilibrium in the non-traded good market, while the wage rate is assumed to be downwardly sticky (in terms of traded goods) but equalised at all times across the two sectors.

Curve PP is a production possibilities curve showing the maximum amounts of the two goods that can be produced, given the economy's technology and factor endowments, while the curves II and /'I' are social indifference curves. 1 Before the change, the economy produces at point A and consumes at point G, with the value of good Y exported matching the value of good X imported. The exogenous fall in the world relative price of its exportable, Y, worsens the economy's terms of trade. Production of Y is discouraged and the production point shifts from A to B, while consumption of Y relative to X is encouraged as consumption shifts from G to H on the lower social indifference curve/'/'.

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