Suppose that a country is exporting good X and importing good Y. Suppose also that, in a particular range of the country's offer curve, a rise in the relative price of X causes the country to export less of X and to import more of Y. Then, in this range,
A) with respect to good Y, the "income effect" of a rise in the terms of trade outweighs The "substitution effect" and the "production effect."
B) with respect to good X, the "substitution effect" of a rise in the terms of trade Outweighs the "income effect" and the "production effect."
C) with respect to good X, the "production effect" of a rise in the terms of trade Outweighs the "substitution effect" and the "income effect."
D) with respect to good X, the "income effect" of a rise in the terms of trade outweighs The "substitution effect" and the "production effect."

Question

Quizplus · Accepted Answer

The income effect suggests that as the relative price of good X rises, the country feels wealthier and may choose to consume more of both goods, leading to less export of X. This outweighs the substitution and production effects in this scenario.

Suppose That a Country Is Exporting Good X and Importing