Jim Whitney Economics 311

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?