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1. The United States and Brazil each produce only cheese and wine. Domestic prices are given in the following table United States $5 per pound Brazil 8 BRL per pound 15 BRL per bottle Wine $8 per bottle On April 1, the London exchange listed an exchange rate of $1-1 BRL According to the table, (1) production of wine has an absolute advantage in the production of cheese and (2) has an absolute advantage in the has a comparative advantage in the production of cheese. has a comparative advantage in the production of wine If the United States and Brazil were the only two countries engaging in trade, what adjustments would you predict assuming exchange rates are freely determined by the laws of supply and demand? Relative to the Brazilian real, the dollar will (5) (1) ○ Brazil (2) O Brazil ° the United States O one cant determine from the information given which country O one cant determine from the information given which country the United States (3) O Brazil (4) O Brazil (5) O become weaker O The United States O The United States O become stronger O remain unchanged3. Great Britain and the United States produce cheddar cheese and blue cheese. Current domestic prices per pound for each type of cheese are given in the following table Cheddar cheese Blue cheese Great Britain £10 £20 United States $35 $50 Suppose the exchange rate is £1-$1 If the price ratios within each country reflect resource use, (1) has a comparative advantage in the production of cheddar cheese has a comparative advantage in the production of blue cheese Assume there are no other trading partners and that the only motive for holding foreign currency is to buy foreign goods. Explain whether the current exchange rate will lead to trade flows in both directions between the two countries O A. Cheddar cheese and blue cheese will be purchased in the United States and sold in Great Britain. Great Britain. the United States. the United States. B. Only cheddar cheese produced in the United States will be traded for blue cheese produced in O C. Cheddar cheese and blue cheese will be purchased in Great Britain and sold in D. Only cheddar cheese produced in Great Britain will be traded for blue cheese produced in O E. Trade will not occur What adjustments might you expect in the exchange rate? Relative to the British pound, the U.S. dollar will (3) After the exchange rate has adjusted, (4) produced in Great Britain will be consumed in the United States and (5) produced in the United States will be consumed in Great Britain. (1) O Great Britain (2) O United States ( O become weaker (4) O blue cheese (5) O cheddar cheese O blue cheese O United States O Great Britain O remain unchanged O become stronger O cheddar cheese4. If one country has an absolute advantage in the production of all goods, it is impossible for that country to benefit from trade A. False B. True When a country has an absolute advantage in the production of a product, it means that country can produce the product at a lower opportunity cost than other countries A. False O B. True 5. If the opportunity cost of producing one gallon of milk is 1 dozen eggs in France and the opportunity cost of producing one gallon of milk is 4 dozen eggs in Sweden, both countries would benefit from trading with each other if the terms of trade were one gallon of milk for dozen eggs. OA. 4 O B. 1 OC. 3 O D. 6 6. In Mexico, a pound of cashews costs 125 pesos and a pound of walnuts costs 95 pesos. In the United States, a pound of cashews costs $7 and a pound of walnuts costs $5. If the exchange rate is $1 16 pesos and there are no transportation costs, Mexico will A. export cashews and walnuts to the United States. O B. import cashews from the United States and export walnuts to the United States. ° C. import walnuts from the United States and export cashews to the United States. D. import cashews and walnuts from the United States.7. Some empirical trade economists have noted that for many products, countries are both importers and exporters. For example, the United States both imports and exports shirts. How can this be explained? OA. Even though the U.S. has a comparative advantage in producing shirts, the country allows others to produce goods to keep the world more politically stable. B. This shows that the idea of comparative advantage and specialization must not be accurate otherwise, this type of activity could not occur. ○ C. Because different consumers have tastes and preferences for different types of shirts, the US could have a comparative advantage in the production of specific kinds of shirts but not all shirts. D. Instead of focusing on comparative advantage, countries should produce some of any good in which the country has an absolute advantage, therefore becoming both an importer and exporter

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