Continue with the scenario of given question the new process in the United States and the resulting change in the international equilibrium price ratio. Focus now on effects in the rest of the world.
a. Show graphically and explain the effect on quantities produced, quantities consumed, and well-being in the rest of the world.
b. Explain as precisely as possible why well-being changes in the rest of the world.
Question
A free-trade equilibrium exists in which the United States exports food and imports clothing. U.S. engineers now invent a new process for producing clothing at a lower cost. This process cannot be used in the rest of the world.
a. What is the effect on the U.S. production-possibility curve?
b. What is the effect on the U.S. willingness to trade? (Assume that the United States remains an importer of clothing.)
c. Assuming that the change in the United States is large enough to affect international prices, will the equilibrium international price of clothing rise or will it fall?