A Situation Of High Rates Of Export

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The initial position of the country depicts a situation of high rates of export due to world prices being high. The government does not interfere with international trade, and the imposition of income tax limits the disposable income of individuals. The reduction of income tax has an effect on exports, especially in the short-term, which comes from the change in the amount of disposable income.
Once the income tax cut is in place, the first effect will be a change in households. When consumers gain the benefit of tax cuts, all the money that increases from the cut goes to consumption (Krugman and Wells 98). Only insignificant portions of this amount go to activities like investment or saving. Thus, the first change within the economy will
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In addition, the price difference with world prices no longer exists, giving firms no incentive to export their commodities. In the long run, firms may increase production to resume their original points of export. However, this effect is abstract and only achievable if the government imposes a corresponding decrease in production taxes.
Graph 1: Shifts in Demand and Price Changes

P2
P1

Y1 Y2

From the graph, the aggregate demand is initially at AD1. However, following the increase in disposable income, the demand shifts to AD2 to depict an increase in demand. This shift causes a corresponding change in prices from P1 to P2, which is an increase in the local pricing of commodities. From the previous information, international prices were higher than local prices. Consequently, the increase in local pricing reflects a situation where the gap in prices closes. A notable change is the increase in GNP, which comes from the rising expenditure of local consumers.
As there have been no changes on the factors of production for the firm, the short-run aggregate supply does not change. This situation may vary in the long-run.
Question 2: Introduction of Production Technology
Initially, the export level to the world is low due to the world prices being less than domestic prices. Consequently, production focuses on satisfying local demand as it offers better pricing than exporting. As there is little incentive to export, there is also little incentive to
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