A free-trade equilibrium exists in a two-region, two-product world

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QUESTION:

A free-trade equilibrium exists in a two-region, two-product world. The United States exports food and imports clothing. A long-term drought now occurs in East Asia.

a. What is the effect on East Asia’s willingness to trade?

b. Assuming that each region is large enough to influence international prices, how does East Asia’s drought affect the equilibrium international price ratio?

c. Show on a graph and explain the effect of all this on the following in the United States: (1) quantities produced of food and clothing, (2) quantities consumed of food and clothing, (3) U.S. well-being.

d. Which group in the United States is likely to gain real income in the long run as a result of all this? Which group in the United States is likely to lose real income?


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