Question

Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Graph the impact on Japan’s terms of trade of the following events: a) A war in the Middle East disrupts oil supply. b) Korea develops the ability to produce automobiles that it can sell in Canada and the United States. c) U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants.

Answer 1

Japan exports manufactured goods (m) and imports raw materials (r). Japan's terms of trade is the world relative price of manufacturers in terms of raw materials. (Pm/Pr).

Terms of trade can be determined by shift in world relative supply and demand.

a. War in middle East disputes oil supply, decreases the supply of raw materials. This increases world relative supply, world relative supply curve shifts out. This decreases the world relative price of manufactured goods. Japan's terms of trade decreases.

b. Korea's increased supply of automobiles increases the supply of manufactured goods. This increases world relative supply. This decreases the world relative price of manufactured goods. World relative supply curve shifts out. Japan's terms of trade decreases.

C. US engineer's development leads to decrease in demand for raw materials. This increases world relative demand. This increases the world relative price of manufactured goods. World relative demand curve shifts out. Japan's terms of trade improves even if no fusion reactor is installed in Japan.

Graph for part a and part b.

/Rs. Relative price of Manufactured Goods. I RD Relative Quantity

Graph for part c.

Relative Price of Manufactured Goods. RO? RD Relative Quantity

If it helps kindly upvote

For doubts comment below