Question

Given the following input-output table, answer questions a-h. Note that a one word answer is not acceptable. For full credit, you must provide explanation for your answers and show how you arrive at them.

                             Man Hour Required to Produce Unit of Output

                               Country A            Country B

                    Good X         3                    12

                    Good Y         2                    14

            a. Which country has absolute advantage in which good? Why?

            b. Which country has comparative advantage in which good? Why?

            c. What is the pre-trade price ratio in each country? Why?

            d. What will be the post-trade price ratio or international terms of trade?

            e. Which country would prefer an international terms of trade of 9? 6? Why?

            f. Let      W_A = wage rate in A in terms of A's currency

                        W_B = wage rate in B in terms of B's currency

                             R = exchange rate defined as number of units of B's currency per unit of                                    

A's currency.

Then, in order to have balance of payments equilibrium, (W_A.R)/W_B must lie in some range, i.e., m < (W_A.R)/W_B < n.

               Determine the value of m and n.

            g. If W_A = 5, W_B = 2 and R = 3, which country will export which good?

h. Given that wages are fixed in each country at W_A = 5 and W_B = 2, what is the limit within which exchange rate can fluctuate in order for comparative advantage to

assert itself.

Answer 1