ECO205: (National Economy and Growth) Explain the patterns of trade, production and consumption bundles, and the gains from trade.

Module / Subject / School:

ECO205: National Economy and Growth

Requirements:

Assume constant opportunity costs. Suppose Country A exports 25X in exchange for some units of Y, following the mutually beneficial Terms of Trade derived from 1a).

Explain the patterns of trade, production and consumption bundles, and the gains from trade. Provide a diagram to illustrate, with Good X on the horizontal-axis. Subsequently, show that if instead, Country A exports 25X in exchange for certain units of Y that does not satisfy the mutually beneficial Terms of Trade:

• There are gains from trade for Country B, but Country A is neither better nor worse off than in Autarky; and

• There are gains from trade for Country A, but Country B is worse off than in Autarky.

Present and explain both cases with the use of diagrams. (Word limit: 700 words)

(50 marks)

What we score:

77%

Our Writer’s Comment

First, start by explaining the patterns of trade, production, and consumption. Make sure you articulate why Country A exports Good X and how this aligns with its comparative advantage. Discuss how trade allows both countries to reach a consumption bundle outside their production possibility frontier (PPF), which represents gains from trade. This should be illustrated with a diagram that has Good X on the horizontal axis, clearly showing the shift in consumption possibilities due to trade.

Next, when discussing scenarios where the Terms of Trade (ToT) are not mutually beneficial, be precise in your explanations. Use separate diagrams for each scenario:

Country A is neither better nor worse off than in Autarky: Show a situation where the ToT doesn’t improve Country A’s consumption beyond what it could achieve alone. The diagram should illustrate that while Country B benefits, Country A’s consumption bundle remains on its original PPF.
Country A gains, but Country B is worse off: In this case, illustrate how the ToT might allow Country A to consume more than in Autarky, but at the expense of Country B, whose consumption bundle is less than what it could achieve on its own.

In your explanation, make sure to connect the diagrams to the theoretical concepts, demonstrating your understanding of how trade impacts each country differently based on the ToT.

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