Basic Trade Model
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Basic Trade Model. See attached file for full problem description.
True/False Explain: According to the Basic Trade Model, if a country is "large" in world markets and experiences a technological improvement in the good that it exports, then the country's terms of trade must decline.
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Solution Summary
The terms of trade generally rises when export prices are rising faster than import prices.
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The terms of trade generally rises when export prices are rising faster than import prices. This is due to the fact that fewer exports have to be given up in exchange for a given volume in imports. Similarly, if import prices rises faster than export prices, the terms of trade will decline as greater volume of exports has to be sold to finance a given amount of imported goods or services.
source: http://www.tutor2u.net/economics/content/topics/trade/terms_of_trade.htm
In our scenario, the "technological improvement" in the good that the large country exports will certainly ...
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