General Equilibrium Geometry of Autarky and Free Trade
Checklist:
___ 1. Suppose that point E is the country's autarky
optimum. Draw the country's autarky social indifference curve 'Ua'.
___ 2. Draw budget line 'BLfe' through point E and parallel to BLf.
(The country can trade along that budget line if it continues to produce at point E.)
___ 3. Under autarkay, is Pb/Pc on the world market higher or lower
than at home? ________
How can you tell from
the diagram?
___ 4. Draw arrow '1' along BLfe to show which direction the country
should trade to reach an indifference curve higher than Ua. Should the country export B or
C? ______
___ 5. Draw arrow '2' along the country's PPF to show which direction
the country should specialize to reach a free-trade budget line higher than BLfe.
Should the country produce more B or more C? ______
___ 6. Suppose that with specialization and trade the country ends up
producing at point Prf and then trading along BLf to its consumption optimum at point Cf.
Draw the country's new social indifference curve 'Uf'.
___ 7. Complete the following table with quantity values from the
diagram (in 1000s):
Autarky | Free trade | |||
B | C | B | C | |
Production | ______ | ______ | ______ | ______ |
Trade | ______ | ______ | ______ | ______ |
Consumption | ______ | ______ | ______ | ______ |
___ 8. What is the value of the free-trade price ratio (pf =
(Pb/Pc)f)? _____
How does it show up in
the diagram?
___ 9. Depict a possible consumption optimum under the assumption that
initially the country can trade along BLfe but cannot adjust its production level from
point E. Label your indifference curve 'Ufe'.
Is the country still better off than under autarky? _____ How
can you tell?