Question

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2. You are given the following Classical-type table indicating the Classical-type table indicating the number of hours of labor input needed to make one unit of output of each of the six commodities in can Assume that the wage rate in Spain is €2/hr, that the wage U h r and that the the wage rate in Spain is €2/hr that the wage rate in UK is £3.2/hr, and that the fixed exchange rate is £1 -1.25 €. th of the six commodities in each of the two countries. Wage Rate Wine Cutlery Cloth Hardware Wheat Cheese Spain €2/hr 4 hr 12 hr 6 hr 15 hr 5 hr 7 hr United Kingdom £3.2/hr 3 hr 4 hr 5 hr 6 hr 2.8 hr 3 hr 1.3 B 1.2 2.5 1.8 2.3 a. With the given information, what will be the trade pattern if the two countries engage in trade? Which goods will Spain export and import? Which goods will UK export and import? Explain. spain will export wheat, cloth, and wine. It will import - cheese, cultery, and hard wore. Uk will import wine, wheat and cloth and export cutlery wine, and cheese b. Keeping wage rate in Spain is €2/hr and keeping the exchange rate at £1 - 1.25 €., calculate the upper and lower limits (in pounds per hour) to the UK wage rate that are consistent with two-way trade between the countries. c. With Wspain at €2/hr and Wuk at £3.2/hr, calculate the upper and lower limits to the exchange rate that are consistent with two-way trade between the countries (exchange rate in terms of €/£).

Answer 1

spain UK wage Rate €2/wr £3-2/h wire war 3h cutlery 12hr 4h clo. ihr 5hr 2 Hardware wheat ich her bur 2. spain cheese • Labour required to produce 1 unit of wine Thr 3hr In 3 hours of labous required to produce 1 writ of wine spain the total wage rate/ Labour LoBit is €8 to produce 1 unit of here In uk the total wage rate or Labour cost is £ 9.6 to produce lunit of wine. two countries The exchange rate between £ 1 = 61.25 = £9.6=E12 uk the 9.6 to between

The above information reveals that the total wage rate or Labour cost in uk is more than spain to produce 1 unit of wine. so it would be better spain export wine to uk and uk import wine from spain. In spain labour 12 hours of required to produce I wait of cutlery In uk 4 hours of labour required to produce 1 unit of cutlery In spain the total wage rate/ total labour cost is €24 to produce 1 unit o cutlery Im UK the total wage rate/ total labour cost is of 12.8 to produce 1 unit of cutlery. The fixed exchange rate is £1 = 1.256 => £12.8= E16

Place The above information reveals that the total wage rate or labour cost en spain is more than uk to produce 1 unit of Cutlery. so it would be bettes UK to export cutlery to spain and Spain import cutlery from UK. total Similary the total labour cost or wage rate in production of 1 unit of cloth in spain is €12. where as the total Labour cost or total wage rate in production of 1 unit ok cloth in uk is L 16 . The fixed exchange rate is £1 = El-ZE L 16 = €20 The above in formation reveal that the total wage rate or to the labour lost in UK is more than spain to produce I unit of cloth. so it woruld be better spain to export cloth to UK and Uk import cloth from spain.

The total labour cost or total wage rate in production of 1 wait of Hardware spain is €30. where as in the total labour cost or total wage rate in production of 1 unit of Hardware in uk is of 19.2. The fixed exchange rate is £1= €1.25 =) £19.2= €24 The above information reveals that the total wage rate or total labons cost in spain is more than UK to produce 1 a wait of Hardware so it noould be better UK to export Hardware to spain and spain import Hardware from uk. Similarly the total labour lost in production of wait of wheat and cheese en spain is E10 and E14 respectively whereas the total labour lost en production of 1 unit of wheat and cheese in spation UK is £8.96 and £9.6 respectively. The fined exchange rate is £1 = El.2 =) £8.96=E11.2 and £9.6=€12 The above information reveal spain to export wheat to uk and uk to export cheese to spain. Instead spain import wheat from uk, and importa T cheese! uk import wheat from spain.

b. The fined exchange rate between two country's is tic1.25. The upper s 22.6: €2 in terms pound. wage rate €2/4 ts same thing £ s.b/ur

with Wspain at €2/wr and Wok £3:2/us The fixed exchange rate between two countries is £1= € 1.25 wage rate tu Uk 23.2/or is same thing as E4/ur wage rate in spain conversely speaking wage rate is spain €2/wr is same thing as £ 1.6/ur wage rate in uk. This in formation reveals that labour lost is more in spain rather tar UK. 13th Euron Availabi