Question

Suppose country X partially specializes in the production of only two goods, food and clothing. At the initial free trade equilibrium, the country produced 40 units of food and 20 units of clothing. At the same time10 units of food were exported and 10 units of clothing were imported by country X. Now suppose a technological innovation in country X leads to a balanced growth while leaving the relative prices of food and clothing unchanged in the international market. Production of food in country X rises to 50 units and that of clothing rises to 25 units. If consumption of food, on the other hand, rises to 42 units, we can most reasonably conclude that the:________.
a. consumption of clothing rises to 32 units.
b. the size of country X’s trade triangle has increased.
c. country X’s willingness to trade declines.
d. consumers in country X are left worse-off.

Answer 1

If food consumption should rise by 42 units we can conclude that country X’s willingness to trade declines.

The reason why the willingness to trade would decline

The willingness to trade for this country would be on a decline given the fact that X's countyry is on a balanced growth path and the prices of their goods are unchanged in the international market.

Due to the lack of change they would not want to engage in trade again with other countries.

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