1. Suppose just trade determines the strength of a currency. A country imports Good I and exports Good X. Because of international conditions, the price of Good I has risen 25%, while the country’s domestic production of Good I has stayed the same. The price of Good X has stayed the same as has the production level of Good X in the country. Consider the commodity terms of trade and answer the following for the country.
(a) If the quantity of its exports stays the same, what happens to the quantity of its imports?
How does this affect the level of wellbeing (satisfaction/utility) in the country? Why?
(b) If the quantity of its imports stays the same, what happens to the quantity of its exports?
How does this affect the level of wellbeing (satisfaction/utility) in the country? Why?
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