Question

Question: The table below shows bushels of wheat and the yards of cloth that the United States and the Unit...

1. The table below shows bushels of wheat and the yards of cloth that the United States and the United Kingdom can produce with one hour of labor time under four different hypothetical situations.

	Case A		Case B		Case C		Case D
	US	UK	US	UK	US	UK	US	UK
Wheat (bushels/man-hour)	4	1	4	1	4	1	4	2
Cloth (yards/man-hour)	1	2	3	2	2	2	2	1

Suppose that in case B in the above table the United States exchanges 4W for 4C with the United Kingdom.

            (a) How much does the United States gain?

            (b) How much does the United Kingdom gain?

            (c) What is the range for mutually beneficial trade?

            (d) How much would each nation gain if they exchanged 4W for 6C instead?

2.     Refer to the table above in question 3.  

Use the information for case B. Assume that labor is the only factor of production and is homogeneous (i.e., all of one type).

            (a)       What is the cost in terms of laborcontentof producing wheat and cloth in the United States and the United Kingdom?

            (b)       What is the dollar price of wheat and cloth in the United States if the wage rate is $6?

            (c)        What is the pound price of wheat and cloth in the United Kingdom if the wage rate is 1 Pound?

3.         

            Using the numbers in the previous question,

            (a)       What is the dollar price of wheat and cloth in the United Kingdom if the exchange rate between the pound and the dollar is 1 pound = 2 dollars? Would the United States be able to export wheat to the United Kingdom at this exchange rate? Would the United Kingdom be able to export cloth to the United States at this exchange rate?

            (b)       What if the exchange rate between the dollar and the pound were

                        1 pound = 4 dollars?

            (c)        What if the exchange rate were 1 pound = 1 dollar?

            (d)       What is the range of exchange rates that will allow the United States to export wheat to the United Kingdom and the United Kingdom to export cloth to the United States?

4.

Start with your answer in (d) above.   Suppose due to recent GDP news, the confidence in the U.S. dollar drops and other countries begin selling off their dollar reserves.  Thus the pound rises a lot against the dollar.   What will happen now with the U.S. and the United Kingdom exports?

Suppose labor unions in the U.K. go on strike and management is forced to double wages to workers in the export industries.  What do you think will happen now?   

Please label answers.

Answer 1

If we suppose that in case B the United States exchanges 4W for 4C with the United Kingdom.

a. If the US gives up 4W for cloth, they can produce 3C. That is when they are not trading. Once the US trades with the UK 4W for 4C, they gain 1C.

b. In order 4W, the UK has to give up 8C. But when it trades with the US 4C for 4W, it gains 4C.

c. The total gains from the trade is 8C-3C=5C. Therefore, the range for mutually beneficial trade is 3C>4W>8C.

d. If the trade is 4W for 6C, the US will gain 3C and the UK will gain 2C.

answered by: anonymous