1) Both Canada and the United States produce lumber and footballs with constant opportunity costs.
The United States can produce either 10 tons of lumber and no
footballs, or 1,000 footballs and no lumber, or any combination in between. Canada
can produce either 8 tons of lumber and no footballs, or 400 footballs and no lumber,
or any combination in between.
- Draw the U.S. and Canadian production possibility frontiers in two separate diagrams,
with footballs on the horizontal axis and lumber on the vertical axis.
- In autarky, if the United States wants to consume 500 footballs, how much lumber
can it consume at most? Label this point A in your diagram. Similarly, if
Canada wants to consume 1 ton of lumber, how many footballs can it consume in
autarky? Label this point C in your diagram.
- Which country has the absolute advantage in lumber production?
- Which country has the comparative advantage in lumber production?
Suppose each country specializes in the good in which it has the comparative advantage,
and there is trade.
- How many footballs does the United States produce? How much lumber does
- Is it possible for the United States to consume 500 footballs and 7 tons of lumber?
Label this point B in your diagram. Is it possible for Canada at the same time to
consume 500 footballs and 1 ton of lumber? Label this point D in your diagram.
2) Since 2000, the value of U.S. imports of men’s and boy’s apparel from China has
more than tripled. What prediction does the Heckscher-Ohlin model make about the
wages received by labor in China?
3) Before the North American Free Trade Agreement (NAFTA) gradually eliminated
import tariffs on goods, the autarky price of tomatoes in Mexico was below the
world price and in the United States was above the world price. Similarly, the autarky
price of poultry in Mexico was above the world price and in the United States was
below the world price. Draw diagrams with domestic supply and demand curves for
each country and each of the two goods. As a result of NAFTA, the United States now
imports tomatoes from Mexico and the United States now exports poultry to Mexico.
How would you expect the following groups to be affected?
- a. Mexican and U.S. consumers of tomatoes. Illustrate the effect on consumer surplus
in your diagram.
- b. Mexican and U.S. producers of tomatoes. Illustrate the effect on producer surplus
in your diagram.
- Mexican and U.S. tomato workers.
- Mexican and U.S. consumers of poultry. Illustrate the effect on consumer surplus
in your diagram.
- Mexican and U.S. producers of poultry. Illustrate the effect on producer surplus in
- Mexican and U.S. poultry workers.
4) How would the following transactions be categorized in the U.S. balance of payments
accounts? Would they be entered in the current account (as a payment to or from a
foreigner) or the financial account (as a sale of assets to or purchase of assets from a foreigner)?
How will the balance of payments on the current and financial accounts change?
- A French importer buys a case of California wine for $500.
- An American who works for a French company deposits her paycheck, drawn on a
Paris bank, into her San Francisco bank.c. An American buys a bond from a Japanese company for $10,000.
- An American charity sends $100,000 to Africa to help local residents buy food after
a harvest shortfall.
5) In the economy of Scottopia in 2014, exports equaled $400 billion of goods and $300
billion of services, imports equaled $500 billion of goods and $350 billion of services,
and the rest of the world purchased $250 billion of Scottopia’s assets. What was the
merchandise trade balance for Scottopia? What was the balance of payments on current
account in Scottopia? What was the balance of payments on financial account? What
was the value of Scottopia’s purchases of assets from the rest of the world?
6) Based on the exchange rates for the first trading days of 2013 and 2014 shown in the
accompanying data, did the U.S. dollar appreciate or depreciate during 2014? Did the
movement in the value of the U.S. dollar make American goods and services more or
less attractive to foreigners?
October 1, 2013 October 1, 2014
US$1.62 to buy 1 British pound sterling US$1.62 to buy 1 British pound sterling
29.51 Taiwan dollars to buy US$1 30.43 Taiwan dollars to buy US$1
US$0.97 to buy 1 Canadian dollar US$0.89 to buy 1 Canadian dollar
98.04 Japanese yen to buy US$1 109.31 Japanese yen to buy US$1
US$1.35 to buy 1 euro US$1.26 to buy 1 euro
0.91 Swiss francs to buy US$1 0.96 Swiss franc to buy US$1
7) In each of the following scenarios, suppose that the two nations are the only trading
nations in the world. Given inflation and the change in the nominal exchange rate,
which nation’s goods become more attractive?
- Inflation is 10% in the United States and 5% in Japan; the U.S. dollar– Japanese yen
exchange rate remains the same.
- Inflation is 3% in the United States and 8% in Mexico; the price of the U.S. dollar
falls from 12.50 to 10.25 Mexican pesos.
- Inflation is 5% in the United States and 3% in the euro area; the price of the euro
falls from $1.30 to $1.20.
- Inflation is 8% in the United States and 4% in Canada; the price of the Canadian
dollar rises from US$0.60 to US$0.75.
8) Suppose that Albernia’s central bank has fixed the value of its currency, the bern, to
the U.S. dollar (at a rate of US$1.50 to 1 bern) and is committed to that exchange
rate. Initially, the foreign exchange market for the bern is also in equilibrium. Draw a diagram showing
this. However, both Albernians and Americans begin
to believe that there are big risks in holding Albernian assets; as a result, they become
unwilling to hold Albernian assets unless they receive a higher rate of return on them
than they do on U.S. assets. How would this affect the diagram? If the Albernian central
bank tries to keep the exchange rate fixed using monetary policy, how will this
affect the Albernian economy?