Essay on "Price Variation Affect on Price Line"

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Price Variation Affect on Price Line

If, at moment 2, the price falls from PA0 to PA2, the income line will rotate upwards from PB0 to PB2 and the curve becomes flatter. The changes occur as the income line reflects a limited variable - the income an individual possess is assumed to have a limited purchase capacity of the a - B product set. Moreover, the price of one product is likely to change as the price of the other product changes as the market adapts to the demand-supply laws.

If we consider the income line inflexible, the price of one product should not necessarily influence the price of the other product, just the overall quantity that can be purchased. Thus, if the price of one good falls and all other parameters remain constant, the quantity of the same good increases. Conversely, if the price of one good increases and all other parameters remain constant, the quantity of the same good falls.

FIG. 2 - PRODUCTION POSSIBILITY FRONTIER budget allows to. A point inside the PPF implies that the production is less than optimal - underemployment of resources. A point on the PPF implies that the production of food and computers employs the optimal resource combination. A steeper curve implies that more food is produced at the expense of computers and a flatter curve implies that more computers are produced at the expense of food. A curve closer to the origin point of the axes reflects a smaller budget and one further away from the axes a larger one.

3. The community indifference curve reflects the combination of goods (quantity) to which the consumer is indifferent. In other words, the points on each curve render the same utilit

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y for the consumer. The curves are concave and downward slopping. The negative slope suggests that the increase in consumption of one good (X) will increase overall satisfaction if it's not offset by a decrease in consumption of the other good (Y). Preferences are depicted upward on the right side of the quadrant - the more to the right, the higher the preference. If the consumer is indifferent between the consumption of 2 goods, then the curves coincide.

4. FIG. 3 - INPUT TABLE

World

If the countries trade, the exchange price will be one tone of one unit of Y for 7/18 units of X. I's opportunity cost of producing one unit of X is 8/5 and II's opportunity cost of producing one unit of X is 5, meaning that I has a comparative advantage in producing X goods. I's opportunity cost of producing one unit of Y is 5/8=0.625 and II's opportunity cost of producing one unit of Y is 7/18=0.389, meaning that II has a comparative advantage in producing Y goods.

5.. FIG. 4 - OUTPUT PRODUCTION TABLE

World exchange 4 of its 10 units of X, it will get ?10 units of Y in return rounded from 10.28=(4*18)/7). This implies that country II will consume the other 10 units of Y (rounded from 68/7) and 4 units of X, so that the world production is all consumed. Country I will consumer more of Y products and country II will consumer more of X products after trade.

6. Given the output consumption table in fig. 5 we can notice that country I has an absolute in the consumption of X and Y (10.28>68/7).

If we were to use the consumption table to decide comparative advantages, we would have to notice that I's opportunity cost of consuming one extra unit of X is 12/7 ? 1.71, whereas II's opportunity cost of consuming an extra unit of X is 17/7 ? 2.42, so I has a comparative advantage in consuming X because it's opportunity cost is lower. Also, II's opportunity cost of consuming an extra unit of Y is 7/17 ? 0.41 and I's opportunity cost of consuming an extra unit of Y is 7/12 ? 0.58, which implies that II has a comparative advantage in consuming Y over I.

7. The Heckscher-Ohlin theory was developed as an alternative to Ricardo's comparative advantage theory and its purpose was to connect the neoclassical price mechanism into the classical international trade theory.

Basically, the theory suggests that international trade pattern will be determined by a country's factor endowments. Thus, each country will specialize in the production of those good that make intensive use of factors that are locally abundant and export those goods and import good that make intensive use of factors that are locally scarce. The H-O model was received with much criticism because its prediction power turned to be low and because it assumed that factors are immobile between countries.

The Leontief paradox refers to the fact that the country with the highest capital endowment (USA) turned out to export goods that have a low capital to labor ratio than its imports.

PART II - 8. FIG. 6 - CONSUMER and PRODUCER SURPLUS equals the benefit generated by producers selling at a higher price than they would be will to sell their products for. After trade, the prices are likely to fall, which will reduce the producers' surplus and increase the consumers' surplus as they will be able to buy a higher quantity. The consumers' surplus exceeds the producers' loss, which implies that the overall trade effect is positive. In case the government imposes a tariff, the consumers will have a loss, producers will have a surplus, because the price level will rise with the tariff and the government will have a surplus, which comes from collecting the tariff.

9. A tariff is tax imposed on imported goods, whereas a subsidy is a form of assistance from the government meant to stimulate production and consumption.

FIG. 7 - TARIFFS reduces the producer's surplus from CDK to KFG and increases the consumer's surplus from ABL to FLJ. In this case the net surplus of the society is BGJ. If the government imposes a tariff, the price increases from F. To C, the consumer's surplus will change to CEL, the producer's surplus increases to KCD, the government will receive a surplus equal to DHIE and DGH and IEJ will be deadweight losses. The tariff will limit imports and therefore consumption and encourage local production.

Subsidies in international trade are used to promote one country's exports by helping national producers to be more price competitive outside the country. The subsidies are more efficient for an export oriented national strategy, whereas tariffs are more efficient when government chose to focus on the internal production and consumption.

10. The effective tax rate is the amount paid by an individual when all payments or all other government offsets are included, which is divided by the tax base (total income). For instance, when some individuals will have higher government offsets, their effective tax rate will be lower, despite the fact that their official tax rate will be equal to other people. The effective rate of protection measures the effective rate of protection of one country and can be calculated as:

where VAd=Value Added in the domestic market

VAint=Value Added in the international market.

The purpose of this protection is to detect the level of value added tax that can be levied in any stage of the production without reducing the competitiveness of national output. If the total tariff value on imports is higher than that on exports, then the protection is negative and national products are discriminated compared to imported ones.

11. FIG. 8 - PAYOFF MATRIX

If the government subsidizes the U.S. chip production with 11, then U.S. will be able to produce regardless of Japan's production decision. The gain will be 1 if Japan produces and 111 if Japan doesn't. Without a subsidy, the production decision will be made depending on the entrant. Thus, if U.S. is the first to produce, Japan won't produce and vice-versa.

The payoff matrix criticism has to do with the fact that is difficult to predict future profits and because production output may be different and if the competition has a better technology it may produce anyway, which will make the subsidy less efficient.

12. The Smoot-Hawley Act translated into the raising of tariffs on U.S. imported goods, which reached record levels. Some say that the initial purpose was to deal with U.S.'s overcapaciy in the 20s, which was not closely followed by the country's purchasing power.

Overall, the act had a negative impact on the country's economy because many countries retaliated and raised similar tariffs on U.S. exported goods, which damaged the country's trade balance and it is said to have contributed to the Great Depression.

13. Dumping - in international trade is equivalent to a producer from one country exporting products to another country at a price that is either below production costs or the price used to sell the same products on the domestic market.

Fair value - refers to the potential market value of a service, good, asset, etc. taking under consideration factors, such as: production… READ MORE

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Quoted Instructions for "Price Variation Affect on Price Line" Assignment:

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This essay will actually be a body of essays answering questions that I will send via Email or refer to questions below; they must be answered in a three-part sequence. Exact specifications are to answer 7 out of 10 questions for each of Part I, II and III, with the total of 21 questions. Answer to the questions must be a half-note page per question on average, making total answer pages to be approximately 10 pages. The subject of the questions are from a International economics course. PART I Choose seven out of ten questions and write answers in essay style in own words.

1. Explain how the changes in price or income affect the slope and the position of the price line. 2. Using the production possibility frontier, explain the meaning of the size, slope, inside, outside and on the curve. 3. What is the community indifference curve? How are indifferences and preferences shown on the curve? Why is it downward sloping?

ANSWER THE NEXT THREE QUESTIONS ON THE BASIS OF THE FOLLOWING INPUT PABLE:

I II

X 5 8

Y 2 10

4. Which country has absolute advantage in which commodity? How about comparative advantage? 5. Transform the input table shown above into an output table. (Take the reciprocals of each number and multiply by a constant number such as 10. 6. Using the output table derived above, decide which country has comparative advantage in which commodity. 7. Starting from an autarkic equilibrium explain diagrammatically how the quantity of production, consumption, exports, and imports change after introduction of trade. Take up the case of an increasing opportunity cost. (Notice on the divergence between consumption and production points after trade) 8. Explain the Heckscher-Ohlin theorem and the Leontief Paradox. How did Leontief explain the paradox? What are some of criticism of the HO model? 9. One of the by-products of the Heckscher-Ohlin theory is that factor prices of trading countries tend to equalize. Explain. 10. Explain the MacDougall test of the Ricardian theory and its implication.

PART II Choose seven out of ten questions and write answers in essay style in your own words (i.e. do not make an outright copy of the lecture notes)

1. Separate the benefit of trade into that of exchange and specialization diagrammatically and explain the welfare implication of the separation.

2. Explain consumers***** and producers***** surplus and how the surplus affects import and export country*****s welfare after trade.

3. Explain the main difference between tariffs and subsidy. Which is more effective? Effective in what way? (Notice on an absence or a presence of consumption effect)

4. What is the effective rate of tariff? How does a tariff on final goods and raw materials differ in determining the effective rate? (Start with the value added concept)

5. Can you explain the strategic trade policy using payoff matrix? What is the weakness of its arguments?

6. Can you explain the historical significance of the Smoot-Hawley Act? What was its intended objective and what followed after its implementation?

7. Explain various concepts contained in U.S. trade law such as dumping, fair value,escape clause, etc?

8. Draw the diagram for economic integration and explain the assumptions behind it. What are the trade creation and diversion effect? (Use the three-country model)

9. What are the import substitution policy and export promotion (or outward-looking) policy? What are the weakness and strength of each policy?

10. Draw a VMP curve and explain the effect of labor immigration on wages, changes in total output and income share between labor and capital.

PART III

Choose seven out of ten questions and write answers in essay style in your own words

1. What is the balance of payments? Explain how current account is organized. What sub-account will be included in the GDP accounting?

2. Explain how the capital account, both long-term and short-term, is organized. Discuss the sales and purchases of securities related to capital inflow and outflow.

3. Explain definitions of three sectoral balances and three overall balances in a way to make them interrelated to each other.

4. Conventional interpretation of the balance of payments is that surplus in current account is desirable. Discuss pro and con arguments of this interpretation.

5. Explain arbitrage, hedging and speculation. Use simple numerical examples.

6. Derive demand and supply curves for foreign exchange. Explain the process of attaining the equilibrium rate.

7. Suppose consumer tastes change in favor of imports. Using the diagram for the foreign exchange market, explain the adjustment process.

8. What is the purchasing power parity? Discuss the absolute and relative version. Explain why the purchasing power parity does not hold very well in reality.

9. What is the interest parity condition (IPC)? What role does the changes in the exchange rate play? How is it related to capital inflow and outflow?

10. What is the Eurocurrency market? Why has the market grown to the present size? What has been the U.S. countermeasure? Discuss how the existence of the Eurocurrency market may complicate the Fed*****s monetary policy. *****

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