Question

Given the following input-output table, answer questions a-h. Note that a one word answer is not acceptable. 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

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

Answer -