810 Words4 Pages

| |Case A |Case B |Case C |Case D |
|US |UK |US |UK |US |UK |US |UK | |Wheat (bushels/man-hour) |4 |1 |4 |1 |4 |1 |4 |2 | |Cloth (yards/man-hour |1 |2 |3 |2 |2 |2 |2 |1 | | 1. For each of the above, indicate which country has comparative advantage, if any, in which commodity, and indicate if trade is possible or beneficial. Case A: US has absolute and comparative advantage in wheat, UK in cloth. Opportunity cost of wheat in US is 1/4=0.25 cloth, in UK is 2/1=2 cloth. Similarly opportunity cost of cloth in US is 4/1=4 wheat, in UK is ½=0.5 cloth. Yes trade is beneficial. Case B: US has comparative advantage in*…show more content…*

At this exchange rate of $2=£1, is trade possible between the two countries? Yes, wheat costs less in US, Cloth costs less in UK f. What will happen in if the pound appreciated to $4=£1? Then wheat will cost £1 per bushel * $4 = $4 per bushel And cloth will cost £0.5 per yard *$4 = $2 per yard Now both commodities are cheaper or equally cheaper to produce in US, so trade is not beneficial. g. What is the range of exchange rates under which trade is possible? As long as one of the commodities is cheaper in one country, trade is possible. So on the one end, when wheat prices become equal in US and UK (i.e. $1.50 = £1) then comparative advantage vanishes. On the other hand, when cloth prices become equal (i.e. $2=£0.5, or $4=£1) then comparative advantage vanishes. 1. Opportunity costs are 2 (uppers) and 0.5 (soles) in Korea, and 1 for both uppers and soles in Thailand. Therefore O.C. of uppers is lower in Thailand and O.C. for soles is lower in Korea. 2. Option B will provide the maximum output since Korea enjoys a comparative advantage is in soles, while Thailand in uppers. Option A will result in a world output of 55,000 pairs of shoes, computed as follows: • In Korea, 100 workers produce (400*100)=40,000 soles, matched by 200 workers produce (200*200) = 40,000

At this exchange rate of $2=£1, is trade possible between the two countries? Yes, wheat costs less in US, Cloth costs less in UK f. What will happen in if the pound appreciated to $4=£1? Then wheat will cost £1 per bushel * $4 = $4 per bushel And cloth will cost £0.5 per yard *$4 = $2 per yard Now both commodities are cheaper or equally cheaper to produce in US, so trade is not beneficial. g. What is the range of exchange rates under which trade is possible? As long as one of the commodities is cheaper in one country, trade is possible. So on the one end, when wheat prices become equal in US and UK (i.e. $1.50 = £1) then comparative advantage vanishes. On the other hand, when cloth prices become equal (i.e. $2=£0.5, or $4=£1) then comparative advantage vanishes. 1. Opportunity costs are 2 (uppers) and 0.5 (soles) in Korea, and 1 for both uppers and soles in Thailand. Therefore O.C. of uppers is lower in Thailand and O.C. for soles is lower in Korea. 2. Option B will provide the maximum output since Korea enjoys a comparative advantage is in soles, while Thailand in uppers. Option A will result in a world output of 55,000 pairs of shoes, computed as follows: • In Korea, 100 workers produce (400*100)=40,000 soles, matched by 200 workers produce (200*200) = 40,000

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