Author Question: The following figure introduces the relationship between industrial production and wholesale price ... (Read 93 times)

SAVANNAHHOOPER23 · **on:** Jun 30, 2018

The following figure introduces the relationship between industrial production and wholesale price index changes between the years 1929-1935. What is the purpose of the following figure?

What will be an ideal response?

Question 2

Use the diagram above to identify the pre-trade situation for Australia and Sri-Lanka.

Where on the K/L axis will you find each of the two countries? Which of the two countries has a higher relative wage, w/r? Which product is the labor intensive, and which is the land intensive one? Show where the relative price of cloth to food will be found once trade opens between these two countries. Show where the relative wages of each will appear.

amy.lauersdorf90 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The purpose is to show that countries that left the gold standard early and adopted counter-deflationary monetary policies, such as Australia and the United Kingdom, experienced milder declines in output during the Great Depression. Countries such as France and Switzerland that stuck to the gold standard longer had greater decline in price level and output.

Answer to Question 2

You will find Sri-Lanka to the left of Australia on the K/L axis.
Australia has a higher relative wage.
Food is the land intensive product.
The relative price PC/PF is found between the two autarkic prices.
The post trade relative wage is between the two autarkic ones on the vertical axis.