5) Suppose that a "small country" experiences growth strongly biased toward its export, clothA) this will tend to worsen the country's terms of trade.B) this will tend to improve the country's terms of trade.C) this will tend to worsen terms of trade for the country's trading partner.D) this will tend to improve terms of trade for the country's trading partner.E) this will have no effect on terms of trade for the country's trading partner
Question
- Suppose that a "small country" experiences growth strongly biased toward its export, clothA) this will tend to worsen the country's terms of trade.B) this will tend to improve the country's terms of trade.C) this will tend to worsen terms of trade for the country's trading partner.D) this will tend to improve terms of trade for the country's trading partner.E) this will have no effect on terms of trade for the country's trading partner
Solution
If a "small country" experiences growth strongly biased toward its export, it means that the country is producing and exporting more of that particular good. In this case, the good is cloth.
So, the correct answer is:
A) this will tend to worsen the country's terms of trade.
Explanation:
A) This will tend to worsen the country's terms of trade: When a small country increases its production and export of a particular good, it can lead to a worsening of the terms of trade. The terms of trade is the ratio of export prices to import prices. If the country is small, its increased production can significantly increase the world supply of that good, which can lower its price in the world market. If the price of the exported good (cloth) decreases and the price of the imported goods remains the same or increases, the terms of trade worsen. This means the country gets fewer imports for each unit of export.
Similar Questions
4) Suppose that a country experiences growth strongly biased toward its export, clothA) this will tend to worsen the country's terms of trade.B) this will tend to improve the country's terms of trade.C) this will tend to leave the country's terms of trade unchanged.D) this will tend to worsen the terms of trade for the country's trading partner.E) this will increase the price of cloth relative to the imported good.
4. Now consider country F in this model to be a small country. Suppose the amount of labor in country Fincreases.i. How does it affect the terms of trade of country F?ii. How does it affect the terms of trade of country H?iii. How does it affect the welfare of country F?iv. How does it affect the welfare of country H?
What four factors influence a country’s terms of trade?
4. Which of the following could explain why the terms of trade of developing countries mightdeteriorate over time?A) Developing country exports consist mainly of manufactured goods.B) Developing country exports consist mainly of primary products.C) Commodity export prices are determined in highly competitive markets.D) Commodity export prices are solely determined by developing countries.E) Developing country exports are too diverse
1) If the ratio of price of cloth (PC) divided by the price of food (PF) increases in theinternational marketplace, thenA) all countries would be better off.B) the terms of trade of cloth exporters will improve.C) the terms of trade of food exporters will improve.D) the terms of trade of all countries will improve.E) the terms of trade of cloth exporters will worsen.
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