# 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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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
[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.
[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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