Answer to Question #283407 in Macroeconomics for Comfort

Question

QUESTION ONE

Given two countries, Zambia and Malawi that produce iron sheets and key holders. Zambia exports

iron sheets and imports key holders. Use an appropriate trade model to illustrate how national welfare

in Malawi is affected or changes. Suppose Zambia undergoes some recession and fails to produce iron

sheets such that her capacity to export gets affected drastically such that she becomes an importer of

iron sheets. What would be the effect of such a slump on ToT for Malawi? [10 marks]

Answer 1

Malawi producers will see a decrease in their short-run marginal production costs as a result of the Great Recession, and this boost in competitiveness will translate into a rise in their sales in overseas markets. By utilizing spatial diversity in the prevalence of the Great Recession in Malawi, there would be inherent problems in establishing a causal link between demand-driven changes in domestic sales and exports.