32. Suppose that China and the United States only trade wheat and textiles with

Question

32. Suppose that China and the United States only trade wheat and textiles with each other. The following graph gives the U.S. supply curve for its exports of wheat to China and the Chinese demand curve for its imports of wheat from the United States. Price of Wheat (yards of textles per1,000 tons of wheat 3,000 U.S. Export Supply 2,000t I Chinese ImportDemand 100 200 300 1,000 tons of wheat 1. How many tons of wheat did the United States produce prior to trade with China? II. How many tons of wheat did China produce prior to trade with the United States? III. What is the international price of wheat in U.S.-Chinese trade? IV. What will happen to the international price of wheat and Chinese imports from the United States if there is a severe drought that reduces the size of the U.S. wheat harvest? V. What will happen to the international price of wheat and Chinese imports if there is a severe drought in China that reduces the size of its wheat harvest?

Explanation / Answer

1. US produced 200 tons of wheat.

2. China produced 100 tons of wheat

3. International price of US-Chinese trade is 2400

4. US export supply curve will shift leftwards as supply of wheat reduces, causing an increase in international price of wheat.

5. If China's domestic production reduces, it will import more, Therefore, the imports from China would increase (Chinese import demand will shift to the right), causing an increase in international price of wheat.

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