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Example2 Answer - ECON 460 Example 2 Consider the following...

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ECON 460: Example 2 Consider the following table showing the labor requirements to produce clothing and corn in China and USA. Wage Clothing Corn USA \$7/hr 1 hr 1 hr China 8 yuan/hr 3 hrs 8 hrs Assume that the exchange rate is \$1 = yuan 6 a. What is the direction of trade for each of the two commodities? USA is country 1 and China is country 2 Clothing: W 1 ea 1j = \$7 * 6 yuan * 1 hr = 42 W 2 a 2j = 8*3 = 24 W 1 ea 1j > W 2 a 2j Thus USA will import Clothing. Corn: W 1 ea 1j = \$7 * 6 yuan * 1 hr = 42 W 2 a 2j = 8*8 = 64 W 1 ea 1j < W 2 a 2j Thus USA will export Corn. b. What are the limits to the wage rate in each country, other things being equal? In USA W 1 e/W 2 = a 2j /a 1j W 1 *6/8 = 3 W 1 = \$4 W 1 e/W 2 = a 2j /a 1j W 1 *6/8 = 8 W 1 = 64/6 = \$10.67 In China W 1 e/W 2 = a 2j /a 1j 7*6/ W 2 = 3 W 2 = 14 yuan W 1 e/W 2 = a 2j /a 1j 7*6/ W 2 = 8 W 2 = 42/8 = 5.25 yuan c. What are the exchange rate limits? W 1 e/W 2 = a 2j /a 1j For Clothing: 7*e/ 8= 3/1 e = 24/7

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For Corn: 7*e/8 = 8 e = 64/7 d. If the following three commodities are included, what will the export and import pattern be?
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