Question

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

(In this question, don’t be surprised if you cannot figure out the first two parts immediately.  It will be simple if you start off by asking how much did the U.S. get in autarky for 1 unit of whatever it is now exporting? Then ask, with trade how much is it now getting with 1 unit of the export good?   Then you can figure out how much it can get for 4 units….  Enough of hints!  Now it is your turn)

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?

(The following two questions are straightforward applications of CA with money which I have done in class.)

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 rangeof 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?   

Answer 1

Answer (a) : If United States needs to exchange 4 Bushels of Wheat, that means United States needs to invest only one hour of its labor force (since in the case B, United States can produce 4 Bushels of Wheat with per hour productivity of its labor force)

                      Whereas, the product it is exchanging its 4 bushels of wheat for is 4 Yards of Cloth which is produced by United Kingdom, however, to produce the 4 units of Cloth United Kingdom would require 2 hours investment of its labor force (since in the case B, United Kingdom can produce 2 Yards of Cloth with per hour productivity of its labor force)

                      Hence, it is a gain for United States by 1 hour of the labor dedication or productivity time.

Answer (b) : If United Kingdom needs to exchange 4 Yards of Cloth, that means United Kingdom needs to invest two hours of its labor force (since in the case B, United Kingdom can produce 2 Yards of Cloth with per hour productivity of its labor force)

                      Whereas, the product it is exchanging its 4 Yards of Cloth for is 4 bushels of wheat which is produced by United States, however, to produce the 4 Bushels of Wheat United States would require only 1-hour investment of its labor force (since in the case B, United States can produce 4 bushels of wheat with per hour productivity of its labor force)

                      Hence, it is a loss for United Kingdom by 1 hour of the labor dedication or productivity time.

Answer (c): Mutually beneficial trade would mean a trade situation where both the economies (or countries as in this case) gain from the trade-off. Here, the mutually beneficial trade off would be if United States exchanges 4 bushels of wheat for 2 Yards of Cloth (or in multiples of these numbers). Here, both the economies would require investing only 1 hour (or in multiple of this number of hours) of their productive labor hours to produce the same quantities of the products.

Answer (d): If United States exchanges 4 bushels of wheat on exchange of 6 Yards of Cloth from the Unites Kingdom, it would be in a position of super gain as for US to produce 4 bushels of wheat , it would only require 1 hour of its labor productivity time, whereas for UK to produce 6 Yards of Cloth it would require 3 hours of its labor productivity hours.

                            Whereas, If United Kingdom exchanges 4 bushels of wheat on exchange of 6 Yards of Cloth from the Unites States, it would be in a position of loss as for US to produce 6 Yards of Cloth, it would only require only 2 hours of its labor productivity time, whereas for UK to produce 4 bushels of wheat it would require 4 hours of its labor productivity hours.