NEOCLASSICAL MODEL

FINAL EXAM

For what kind of countries and run is the Neoclassical model?

For small countries in the short run

In the Neoclassical mode, when we open trade, the average consumer is better off, worse off or same?

Better off

What are the impacts of the exchange effect?

The budget line is steeper and we can trade outside out PPF

What are the impacts of the specialization effect?

Take advantage of your CA, and move the budget line

What are the consequences if the exchange effect dominates?

You will demand more of the good you import. And opening trade will increase the average utility of your economy

How welfare changes if terms of trade decrease?

Welfare will decrease, but you can never be below autarky level.

Welfare effects of opening trade for workers, capitalists, land owners (assuming we have CA in agricultural goods)

Workers: gain in terms of A and lose in terms of M (workers can consume less of the product they export)

Capitalists: better off

Landowners: worse off

How many factors of productions do we have? Are they fixed or mobile?

Labor (mobile)

Capital (fixed)

Land (fixed)