Question

Explain the likely impact of a long-term drought in East Asia on the free-trade equilibrium that exists in a two-region, two-product world, where the United States exports food and imports clothing.

A) The United States will increase food imports and decrease clothing exports.
B) The United States will decrease food imports and increase clothing exports.
C) The United States will decrease both food imports and clothing exports.
D) The United States will increase both food imports and clothing exports.

Answer 1

A long-term drought in East Asia would likely result in the United States increasing food imports and decreasing clothing exports.

Step-by-step explanation:

A long-term drought in East Asia would likely have a significant impact on the free-trade equilibrium in a two-region, two-product world where the United States exports food and imports clothing.

Due to the drought, the supply of agricultural products, such as food, will decrease. As a result, the United States will need to increase food imports to compensate for the reduced supply.

At the same time, the decreased supply of agricultural products will lead to an increase in their prices. This, in turn, would make it more expensive for the United States to produce clothing domestically. Therefore, the United States will decrease clothing exports as it becomes less competitive in the global market for clothing.