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Diagrams – Section 4 January 20, 2011

Posted by Avu in Section 4.
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J-Curve: Even if the Marshall-Lerner condition is fulfilled, depreciation will result in a deficit economy's deficit increasing before, over time, recovering and becoming a surplus.

Comparative Advantage: With the same resources, Germany can produce more beer than Russia. Therefore it has comparative advantage when it comes to beer. However, Russia can produce more vodka, and therefore has a comparative advantage in vodka.

Tariff: With the imposition of a tariff, the tax drives price up from P1 to P2. The higher price allows more domestic suppliers to compete, increasing domestic supply from Q1 to Q3. However, the lower quantity demanded due to higher prices results in fewer world suppliers from competiting, lowering overall supply from Q2 to Q4.

Subsidy: The imposition of a subsidy shifts supply from S to S+Subsidy, which maintains the same price, but effects quantity. Domestic quantity increases from Q1 to Q2, while import quantity decreases from Q1Q3 to Q2Q3

Exchange Rate Appreciation: A high interest rate leads to investment in the US dollar by Japanese, meaning the demand, quantity, and price for US dollars in terms of Yen increase.

Exchange Rate Depreciation: Due to higher demand for US dollars, Japanese yen floods into the international market. Supply increases from S to S2, leading to lower prices and higher quantities of yen.

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