Trade Consider a world with three equal-sized economies (A, B, and C) and three goods (clothes, cars, and computers). Assume that consumers in all three economies want to spend an equal amount on all three goods. The value of production of each good in the three economies is given below: Table 1: Value of Production A B C Clothes 10 0 5 Cars 5 10 0 Computers 0 5 10 1. What is GDP in each economy? If the total value of GDP is consumed and no country borrows from abroad, how much will consumers in each economy spend on each of the goods? 2. If no country borrows from abroad, what will be the trade balance in each country? What will be the pattern of trade in this world (ie. which good will each country export and to whom)? 3. Given your answer to part (2), will country A have a zero trade balance with country B? with country C? Will any country have a zero trade balance with any other country? 4. The US has a large trade deficit. It has a trade deficit with each of its major trading partners, but the deficit is much larger with some countries (eg. China) than with others. Suppose the US eliminates its over all trade deficit (with the world as a whole). Do you expect it to have a zero trade balance with every one of its trading partners? Does the especially large trade deficit with China necessarily indicate that China does not allow US goods to compete on an equal basis with Chinese goods?

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