"If we observe that a home country's volume and terms of trade are both movingin the same direction (i.e., either both increasing or both decreasing), then we can surmise that the home country's offer curve is shifting. However, if we observe that the home country's volume and terms of trade are moving in opposite directions (i.e., one is increasing and the other is decreasing), then we can surmise that the foreign offer curve is shifting." Is this statement correct or incorrect? Illustrate and explain your answer. (Assume "elastic" offer curves throughout.)

Question

Quizplus · Accepted Answer

The Answer is This statement is incorrect. The movement of a home country's volume and terms of trade in the same or opposite directions does not necessarily indicate a shift in the offer curve of either the home country or the foreign country.

The offer curve represents the various combinations of goods that a country is willing to trade at different terms of trade. It is determined by the country's production possibilities and preferences. In the case of elastic offer curves, the country is willing to trade a wide range of quantities at different terms of trade.

When both the volume and terms of trade of the home country are moving in the same direction, it simply means that the country is trading more or less of its goods at better or worse terms of trade. This does not necessarily indicate a shift in the offer curve. It could be due to changes in demand, changes in production, or changes in the terms of trade set by the foreign country.

Similarly, when the volume and terms of trade are moving in opposite directions, it does not necessarily indicate a shift in the foreign offer curve. It could be due to changes in the foreign country's demand, production, or terms of trade set by the home country.

In conclusion, the movement of a home country's volume and terms of trade does not directly indicate a shift in the offer curve. Other factors need to be considered to determine if there has been a shift in the offer curve of either the home country or the foreign country.

"If We Observe That a Home Country's Volume and Terms