(a) Define the five types of “production effects” of economic growth in a countr
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Question
(a) Define the five types of “production effects” of economic growth in a country and the five types of “consumption effects” of the economic growth. Then define the types of possible “overall” or “net” effects of the country’s growth on the relative importance of the trade sector.
(b) Developing countries are often concerned that their terms of trade might deteriorate as economic growth occurs. In terms of the analysis of part (a) of this question, other things equal, what type(s) of growth must occur and what type of country (“large” or “small”) must a developing country be in order for the country’s terms of trade to deteriorate as the country grows? Explain.
Explanation / Answer
When the economic growth occurs production possibility curve shift outward and the level of production and consumption of goods changes and the country will have the opportunity to select a point on new ppf that will maximize their profits. If country is producing two goods wine and electronics,and it export wine and import electronics, then,
1.if the point on new ppf reflects output of wine and electronics that are proportinally the same as earlier, or the ratio of elctronic to wine production is constant - this a neutarl production effect
2.if the production of wine(export good) is relatively greater than the production of electronics (import good) on new ppf - this is a protrade production effect.
3.if the point on new ppf demonstrate increase in the production of wine but a decrease in the production of electronics - this is ultra protrade production effect
4..if the point on new ppf demonstrate increase in the production of both goods but relatively greater increase in the production of electronics than wine - this is antitrade production effect
5.if the point on new ppf demonstrate increase in the production of both goods but relatively greater increase in the production of wine than electronics - this is ultra antitrade production effect.
CONSUMPTION EFFECT
Simliar technique will be used to define consumption effect.
When the economic growth occurs consumer equlibirium level will shift outward. With growth there is increase in real income which is indicated by the rightward shift in consumption possibilities line (the international terms of trade line)
1.if the consumption of both the goods i.e wine and electronics is propotionally the same as earlier -this is neutral consumption effect
2.if growth in real income reflect relatively larger increase in consumption of winethan in that of electronics because wine is the export good and increase in real income reducces countrys willingness to export - this is a antitrade production effect.
3.if consumption of wine increases on the new consumption possibilities line and consumption of electronics falls-ultra antitrade production effect.
4.if consumption of both the goods increases on the new consumption possiblity line,but consumption of electronics(import good) increases relatively more than wine ( export good)- protrade consumption effect
5.if consumption of both the goods increases on the new consumption possiblity line,but consumption of wine (export good) increases relatively more than electronics ( import good)- ultra protrade consumption effect.
Q.2-In order to analyse part (a)of the question a developing country must be a small country because small country cannot influence world prices, and the types of economics growth which must occur are the changes in technology and accumulation of factors such as capital and labor because they affect the PPF in different ways.
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