Given provisions of specific factors model of international trade, what are the main effects for an individual economy displayed and implied by the figure below? Select one – the most appropriate answer.

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The graph and the question refer to the specific factors model of international trade, where a rise in the relative price of cloth (PC/PF) changes the incentives for production and trade in the economy.

Option presented: "Economy at hand begins exporting cloth since its relative price increased, it consequently starts importing food, the relative quantity of cloth produced by an economy increases."

First, consider what a rise in the relative price of cloth signifies. When PC/PF increases, cloth becomes relatively more valuable relative to food. In a country that can produce both goods, resources (in the specific factors framework) shift toward the more valuable sector to earn higher revenue, raising cloth production and reducing food production.

Now, relate this to trade outcomes. If the country increases cloth production due to the higher relative price, it has more cloth available for export. At the same time, it requires fewer imports of cloth because it can satisfy more domestic cloth demand with its own higher production. This typically implies an export of cloth and an accompanying need to import food (since the economy may reduce food production). The graph’s point movement (from the initial equilibrium to a new point where the relative price of cloth is higher) aligns with increased cloth output and external trade where cloth is exported.

Why this option is plausible: it captures the two core effects of a relative price increase in cloth under the specific factors model—(output expansion in the cloth sector and trade pattern shift toward cloth exports, with corresponding food imports as demand shifts and production reallocation occur).

Why other potential interpretations would be inconsistent with the model (if any were provided): in a standard specific factors setting, a rise in the relative price of one good typically does not reduce its production, nor does it imply that a country would exclusively produce more of the other good without a reallocation toward the rising-price sector. If one suggested that both goods’ outputs rise or that exports shift in favor of the other good, that would contradict the mechanism of factor reallocation to the now relatively more profitable sector.

In summary, the option describes the expected outcome under a rise in the relative price of cloth: the economy produces more cloth for export and imports more food, with cloth output increasing. The reasoning aligns with the model’s core intuition about price signals guiding production and trade.

econ_420_120255_249094 Midterm Exam 1

Given provisions of specific factors model of international trade, what are the main effects for an individual economy displayed and implied by the figure below? Select one – the most appropriate answer.

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