Q. Suppose Albania is exporting product B, and experienced economic growth biased in favor of product B as seen in the Figure above. We are also told that Albania's new consumption point is at point d. Would you still consider the economic growth, which took place biased in favor of B? If Albania were a large country how would this growth affect its terms of trade?
Answer: This is a comparatively difficult case. On the other hand the growth is still theoretically export biased. Though, Albania's expenditure clearly shifted in favour of its import product A. In this case the worsening in the terms of trade would be a lot more pronounced than before and may lead to a case of immiserizing growth. Though, for this to take place there should have been a major shift in the taste patterns the old community indifference map is not longer applicable. Consequently when we attempt to judge the direction and magnitude of the welfare change we are evaluate the old versus new taste preferences which raise the classic index number problem.