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Asssignment 5
Lesson 9
1.
Explain how absolute advantage and comparative advantage differ? (2
Marks)
2.
Kyle can read 20 pages of economics in an hour. He can also read 50
pages of history in an hour. He spends 5 hours pre day studying. (5 Marks)
1.
(i) Draw Kyle's production possibilities frontier for reading economics
and history.
2.
(ii) What is Kyle's opportunity cost of reading 100 pages of history?
3.
Explain in each case whether the following statements are true or false.
(6 Marks)
1.
(i) "Two countries can achieve gains from trade even if one of the
countries has an absolute advantage in the production of all goods."
2.
(ii) " Extremely talented people have a comparative advantage in
everything they do."
3.
(iii) If a certain trade is good for one person, it can't be good for
the other one."
4.
Suppose that there are 10 million workers in Canada, and that each
worker can produce either 2 cars or 30 tonnes of wheat in a year. (12 Marks)
1.
(a) What is the opportunity cost of producing a car in Canada? What is
the opportunity cost of producing a tonne of wheat in Canada? Explain the
relationship between the opportunity costs of the two goods.
2.
(b) Draw Canada's production possibilities frontier. If Canada chooses
to consume 10 million cars, how much wheat can it consume without trade? Label
this point on the production possibilities frontier.
3.
(c) Suppose that the United States offers to buy 10 million cars from
Canada in exchange for 20 tonnes of wheat per car. If Canada continues to
consume 10 million cars, how much wheat does this deal allow Canada to consume?
Label this point on your diagram. Should Canada accept the deal?
5.
What is the relationship between a country's trade deficit, its
government budget deficit, and it private sector deficit? (2 Marks)
6.
What determines the value of the exchange rate? (2 Marks)
7.
Suppose that there are 10 million workers in Canada and South Korea and
each worker in Canada and South Korea can produce 4 cars per year. A Canadian
worker can produce 10 tonnes of grain a year, whereas a South Korean worker can
produce 5 tonnes of grain a year. The following table shows the production of
grain and cars for the two countries, Canada and South Korea. (20 Marks)
|
1 Worker
|
Cars
|
Grain
|
|
Canada
|
4
|
10
|
|
South Korea
|
4
|
5
|
8.
(a) For this situation, construct a table outlining the opportunity
costs of producing grain and cars in Canada and South Korean.
9.
(b) Graph the production possibilities frontier of the Canadian and
South Korean economies.
10.(c) For Canada, what is the opportunity cost of a
car? For Canada, what is the opportunity cost of grain? For South Korea, what
is the opportunity cost of a car? For South Korea, what is the opportunity cost
of grain?
11.(d) Which country has an absolute advantage in
producing cars? Which country has an absolute advantage in producing grain?
12.(e) Which country has a comparative advantage in
producing cars? Which country has a comparative advantage in producing grain?
13.The international transactions for the country
Kyleland for a given year are reported in the table below. (8 Marks)
|
Transaction
|
Amount (billions of dollars)
|
|
Exports of goods & services
|
100
|
|
Imports of goods & services
|
130
|
|
Transfers to the rest of the world
|
20
|
|
Loans to the rest of the world
|
60
|
|
Loans from the rest of the world
|
?
|
|
Increases in official reserves
|
10
|
|
Net interest payments
|
0
|
14.
What is the amount of loans from the rest of the world?
15.What is the current account balance?
16.What is the capital account balance?
17.What is the official settlements balance?
18.Explain how each of the following will affect the
relative values of the dollar and the euro: (6 Marks)
1.
Income growth higher in Canada than in Europe.
2.
Inflation higher in Europe than in Canada.
3.
A real interest rate higher in Canada than in Europe.
19.Suppose that the exchange rate between the Canadian
dollar and the Euro is 2 Euros per Canadian dollar. (6 Marks)
1.
What is the exchange rate in terms of dollars per Euro?
2.
What is the price in dollars of a i-phone selling for 250 Euros?
3.
What is the price in Euros of a computer selling for $1,000 dollars?
20.What will happen to the supply of dollars, the
demand for dollars, and the equilibrium exchange rate of the dollar in each of
the following cases? (20 Marks)
1.
Canadians buy more European goods.
2.
Europeans invest in the Canadian stock market.
3.
European tourists flock to Canada
4.
Europeans buy Canadian government bonds.
5.
Canadian tourists flock to Europe
21.You are trying to decide whether to buy some laptop
computers for your business in either Canada or in United States. Looking at
identical machines on the Dell Canada and the Dell US web sites, you find that
they sell for US $2000 (US dollars) in the United States and C$3,000 (Canadian
dollars) in Canada. (10 Marks)
1.
Where would you buy the laptop computer if the exchange rate between the
Canadian dollar and the U.S. dollar is U.S. $0.80 per Canadian dollar?
2.
Where would you re-sell it if you wanted to make a profit? (Ignore any
taxes, tariffs, transportation costs, and differences in quality).
3.
Does purchasing power parity hold?
4.
If many Canadian and American businesses acted like you, and if he
exchange rate was flexible, what would happen to the value of the exchange
rate?
5.
What would be the new equilibrium exchange rate that would make
purchasing power parity hold for laptops, if the U.S. dollar price and the
Canadian dollar price stayed constant?