I MID-TERM REVIEW -- ANSWERS

I MID-TERM REVIEW - ECONOMICSOFGLOBAL BUSINESS MID-TERM REVIEW ANSWERS Question1 With reference to the following table assume that the wage rate is

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ECONOMICS OF GLOBAL  BUSINESS  MID-TERM REVIEW ANSWERS
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Question 1 With reference to the following table assume that the wage rate is $6/hr in the U.S U.K Wheat (bushels/hr) 6 1 Cloth (yds/hr) 3 2
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[a] Express P[W] and P[C] in the U.S in $ and  in the U.K in £ in the absence of trade [a] P[W] = $1.0/bushel P[C] = $2.0/yd in U.S P[W] = £1.8/bushel P[C] = £0.9/yd in U.K
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[b] If the exchange rate is 3$/£ which  good will the U.S export and import? If £1 = $3 then PW = $5.4/bushel PC = $2.7/yd in U.K in the absence of trade Since the U.S has lower costs in both goods, U.S will export both goods to the U.K.
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[c] What if 1£ = $0.50? [d] What if 1£ = $2.00? If £1 = $0.5 then PW = $0.9/bushel PC = $0.45/yd in U.K in the absence of trade Since the U.K has lower costs in both goods, U.K will export both goods to the U.S. If £1 = $2 then PW = $3.6/bushel PC = $1.80/yd in U.K in the absence of trade Wheat is cheaper in the U.S and so it will export wheat and since cloth is cheaper in the U.K, the U.S will import cloth.
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[e] What is the range of x-rate over which mutual  trade (both nations exporting and importing) will occur?  [e] P(W)/P(C) in U.S = 1/2P(W)/P(C) in U.K = 2 For mutually beneficial trade: 1/2 < P(W)/P(C) < 2 Let exchange rate be x$/L. U.S exporting W => P(W) in U.K > P(W) in U.S
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This note was uploaded on 11/07/2010 for the course ECON 0001 taught by Professor Kitsikopoulos during the Spring '08 term at NYU.

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I MID-TERM REVIEW - ECONOMICSOFGLOBAL BUSINESS MID-TERM REVIEW ANSWERS Question1 With reference to the following table assume that the wage rate is

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