Consider again Figure 2.3, which shows free trade in motorbikes. Assume that U.S.

QUESTION:

Consider again Figure 2.3, which shows free trade in motorbikes. Assume that U.S. productivity in producing motorcycles increases. What is the effect on the U.S. domestic demand and/or supply curve(s)? What is the effect on the U.S. demand-for-imports curve? What is the effect on the equilibrium of international price?

Figure 2.3: The effects of Trade on Production, Consumption, and Price, Shown with Demand and Supply Curves


ANSWER:

The supply curve SUS shifts down (or to the right). The U.S. demand for imports curve Dm shifts to the left (or down). The equilibrium international price decreases below 1,000—it is shown by the intersection of the new U.S. Dm curve and the original Sx curve.

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