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Question 3 (20 marks) Australia trades with India. Australia imports cotton from India and exports copper...

Question 3

Australia trades with India. Australia imports cotton from India and exports copper to India. With the development of new technology India is producing 30% more cotton than before.  

  1. As a result, what is likely to happen to the relative supply and relative demand of cotton to copper in the world market? What is likely to happen to the relative price of cotton to copper in the world market? Explain.

  2. Further to part A, how will Australia’s terms of trade be affected? Explain.

  3. Further to part B, how will Australia’s welfare be affected? Explain.

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Answer #1

As a result, what is likely to happen to the relative supply and relative demand of cotton to copper in the world market?

As a result, there will be a more supply of cotton when compared to copper


What is likely to happen to the relative price of cotton to copper in the world market?


There will be a decrease of price in cotton because of more production and increase the price of copper

Further to part A, how will Australia’s terms of trade be affected?

I think Australia's terms of trade will not get affected by this because there is an increase in the production of cotton

Further to part B, how will Australia’s welfare be affected? Explain.

Australia's welfare will not get affected and it completely depends upon the future fluctations in the market

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