Question

Let two countries with offer curves y =5x + 10x^2 and y =20x -5x^2
(a) Determine the equilibrium terms of trade.

(b) Determine the autarky terms of trade and show that the equilibrium terms of
trade lie between the two autarky ones.

Answer 1

Answer on Question # 44839, Economics, Finance

Task:

Let two countries with offer curves $y = 5x + 10x^2$ and $y = 20x - 5x^2$

(a) Determine the equilibrium terms of trade.

(b) Determine the autarky terms of trade and show that the equilibrium terms of trade lie between the two autarky ones.

Answer:

(a) Determine the equilibrium terms of trade.

$$\left\{ \begin{array}{l} y = 5x + 10x^2 \\ y = 20x - 5x^2 \end{array} \right.$$ $$5x + 10x^2 = 20x - 5x^2$$ $$\left\{ \begin{array}{l} x = 0 \\ x = 1 \end{array} \Rightarrow (x = 0; y = 0); (x = 1; y = 15) \right.$$

These functions intersect at points $x = 0$ and $x = 1$ and so if you look at the graphics of these functions is the equilibrium terms of trade lie between the two autarky ones. It is more rational.

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