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Consider a world with three equal-sized economies (Black Lodge, White Lodge, and...

Jan 10, 2024

Consider a world with three equal-sized economies (Black Lodge, White Lodge, and Twin Peaks) and three goods (Ice cream, Biriyani, and Pizza). Assume that consumers in all three economies want to spend an equal amount on all three goods. The following table shows the value of production of each good in the three economies. Black Lodge White Lodge Twin Peaks Ice cream 20 0 10 Biriyani 10 20 0 Pizza 0 10 20 (a) (5 points) What is the GDP of each economy? How much will consumers spend on each of these goods in all of three economies? (b) (5 points) What is the trade balance in each country if none of the three countries borrow from abroad? What will be the pattern of trade between the three countries?

Generated Graph

Solution by Steps

step 1

Calculate the GDP of Black Lodge using the given values for Ice cream, Biriyani, and Pizza

step 2

GDP of Black Lodge = Ice cream + Biriyani + Pizza = 20 + 10 + 0 =

30

step 3

Calculate the GDP of White Lodge using the given values for Ice cream, Biriyani, and Pizza

step 4

GDP of White Lodge = Ice cream + Biriyani + Pizza = 0 + 20 + 10 =

30

step 5

Calculate the GDP of Twin Peaks using the given values for Ice cream, Biriyani, and Pizza

step 6

GDP of Twin Peaks = Ice cream + Biriyani + Pizza = 10 + 0 + 20 =

30

step 7

Calculate the total spending on each good in all three economies

step 8

Total spending on Ice cream = Black Lodge + White Lodge + Twin Peaks = 20 + 0 + 10 =

30

step 9

Total spending on Biriyani = Black Lodge + White Lodge + Twin Peaks = 10 + 20 + 0 =

30

step 10

Total spending on Pizza = Black Lodge + White Lodge + Twin Peaks = 0 + 10 + 20 =

30

Answer

GDP of Black Lodge = 30, GDP of White Lodge = 30, GDP of Twin Peaks = 30. Total spending on Ice cream = 30, on Biriyani = 30, on Pizza = 30.

Key Concept

GDP Calculation and Total Spending

Explanation

The GDP of each economy is calculated by summing the value of production of each good. Total spending on each good is the sum of its value across all economies.

Solution by Steps

step 1

Calculate the trade balance of Black Lodge by subtracting the average total spending from its GDP

step 2

Trade balance of Black Lodge = GDP of Black Lodge - (Total spending on Ice cream + Biriyani + Pizza) / 3 = 30 - (30 + 30 + 30) / 3 =

30 - 30 = 0

step 3

Calculate the trade balance of White Lodge by subtracting the average total spending from its GDP

step 4

Trade balance of White Lodge = GDP of White Lodge - (Total spending on Ice cream + Biriyani + Pizza) / 3 = 30 - (30 + 30 + 30) / 3 =

30 - 30 = 0

step 5

Calculate the trade balance of Twin Peaks by subtracting the average total spending from its GDP

step 6

Trade balance of Twin Peaks = GDP of Twin Peaks - (Total spending on Ice cream + Biriyani + Pizza) / 3 = 30 - (30 + 30 + 30) / 3 =

30 - 30 = 0

step 7

Determine the pattern of trade between the three countries

step 8

Since the trade balance of each country is zero, there is no borrowing from abroad, and consumers spend equally on all goods, the trade between the countries is balanced

Answer

Trade balance of Black Lodge = 0, Trade balance of White Lodge = 0, Trade balance of Twin Peaks = 0. The pattern of trade between the three countries is balanced.

Key Concept

Trade Balance Calculation

Explanation

The trade balance is calculated by subtracting the average total spending on all goods from the GDP of each country. A balanced trade means no country is borrowing from abroad.