Principles Of Economics, Student Value Edition
12th Edition
ISBN: 9780134079288
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: Prentice Hall
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Question
Chapter 33, Problem 2.4P
Subpart (a):
To determine
The
Subpart (b):
To determine
The currency exchange and trade flow.
Subpart (c):
To determine
The adjustment in exchange rate.
Subpart (d):
To determine
The trade flow prediction after the exchange rate is adjusted.
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We are looking at gas trade between Russia and the EU, assuming that both regions have upward-sloping supply curves and downward-sloping demand curves in a diagram with quantity on the horizontal axis and price on the vertical axis. To simplify the situation, we also assume that the exchange rate is constant and equal to 1 (so we do not need to differentiate between prices in Russia and the EU). In autarky equilibrium, there is a higher price in the EU than in Russia. Unless otherwise specified, there are no trade costs, and the capacity of the pipelines is not binding (i.e., with free trade, prices are initially the same in the EU and Russia). Without Nord Stream 1/2 in operation, the capacity of gas deliveries to Europe is much lower (but not zero). What happens (with the welfare of the two countries and consumer/producer surplus) if the EU stops importing Russian gas?
We are looking at gas trade between Russia and the EU, assuming that both regions have upward-sloping supply curves and downward-sloping demand curves in a diagram with quantity on the horizontal axis and price on the vertical axis. To simplify the situation, we also assume that the exchange rate is constant and equal to 1 (so we do not need to differentiate between prices in Russia and the EU). In autarky equilibrium, there is a higher price in the EU than in Russia. Unless otherwise specified, there are no trade costs, and the capacity of the pipelines is not binding (i.e., with free trade, prices are initially the same in the EU and Russia).
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Chapter 33 Solutions
Principles Of Economics, Student Value Edition
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