2. Trade Balances and the J-Curve
a). Provide the TB function from the perspective of Korea, labeling each item appropriately, assuming its counterpart is the rest of the world (ROW).
b) Now graph Korea’s trade balance versus Korea’s real exchange rate.
c) Suppose Korea’s government decides to reduce its taxes on workers in Korea show how its trade balance curve will shift.
d) If Rest of the World Taxes income were to rise (an increase in Y*) would the trade balance curve shift in the same direction as the one described in c)
e) Finally, suppose new optimism about trade opportunities cause Korea’s currency, the won, to appreciate. Using a graph depicting J-curve effects, demonstrate how Korea’s exports (EX), imports (IM) and trade balance (TB) will evolve over time. For reference, you graph should also illustrate the change in Korea’s exchange rate (EKOR|other) over the same time interval.
