• Suppose there are two countries in the world; Turkey and Greece, and they are trading with each other. Turkey is exporting cloth to Greece and Greece is exporting food to Turkey. Using the Standard Model of Trade, assume both countries do not differ in their consumption tastes while they differ in terms of production possibilities frontier. Terms of trade measured by Pc/Pf.
• Draw world relative supply and world relative demand curves (x = relative price of cloth and y = Relative quantity of cloth). (5 points)
• Suppose, due to technological progress, export biased economic growth takes place in Turkey. Illustrate the changes in the production possibilities frontier of Turkey. (5 points)
• What would happen to world relative supply and relative price of cloth after the change, with relative demand constant? Express the change graphically (x = relative price of cloth and y = relative quantity of cloth). (5 points)
• What happens to Turkish terms of trade as the result of this change? Explain. (5 points)