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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?

Answer

The GDP of Black Lodge is

30, White Lodge is

30, and Twin Peaks is

30. Consumers in all three economies will spend

10 on each good.

Key Concept

Gross Domestic Product (GDP) and Consumer Spending

Explanation

GDP is the total market value of all final goods and services produced within a country in a given period. In this case, GDP for each economy is calculated by summing the value of production of Ice cream, Biriyani, and Pizza. Since consumers want to spend an equal amount on all three goods and the economies are equal-sized, each consumer will spend one-third of their economy's GDP on each good, which is

10 (

30 GDP divided by 3 goods).

Answer

The trade balance in each country is zero if none of the three countries borrow from abroad. The pattern of trade will likely involve Black Lodge exporting Ice cream and Biriyani to the other two economies, White Lodge exporting Biriyani and Pizza, and Twin Peaks exporting Pizza and Ice cream.

Key Concept

Trade Balance and Trade Patterns

Explanation

The trade balance is the difference between the value of a country's exports and the value of its imports. If a country does not borrow from abroad, its exports must equal its imports, resulting in a trade balance of zero. The pattern of trade will be determined by the comparative advantage of each country, meaning that each country will export the goods it produces in surplus (and thus most efficiently) and import the goods in which it has a deficit.