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Assume Indonesia and China are trading partners. Indonesia initially exports palm oil to and imports lubricants from China. Using the standard trade model, explain how
Assume Indonesia and China are trading partners. Indonesia initially exports palm oil to and imports lubricants from China. Using the standard trade model, explain how an increase in the relative price of palm oil, in relation to lubricants prices, would affect the production and consumption of palm oil for Indonesia (assuming that taste for both goods is the same in both countries). If palm oil's income effect is greater than the substitution effect, what would happen to palm oil consumption in Indonesia.
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