Question 1
If, over a period of a year, a country's import price index rises from 100 to 120 and its export price index rises from 100 to 110, its index for the terms of trade has
◦ risen from 100 to 110.
◦ fallen to 91.67.
◦ risen from 100 to 120.
◦ risen to 109.09.
◦ fallen from 110 to 100.
Question 2
Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.
FIGURE 19-1
Refer to Figure 19-1. At the "terms of trade" shown by the dotted lines,
◦ only Japan can benefit from trade.
◦ consumers will press for tariffs.
◦ resources will be permanently unemployed in Japan.
◦ resources will be permanently unemployed in Ireland.
◦ both countries can experience gains from trade.
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