Suppose that there are 10 million workers in Canada and South Korea and each worker in Canada and...

Question

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

(a) For this situation, construct a table outlining the opportunity costs of producing grain and cars in Canada and South Korean.
(b) Graph the production possibilities frontier of the Canadian and South Korean economies.
(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?
(d) Which country has an absolute advantage in producing cars? Which country has an absolute advantage in producing grain?
(e) Which country has a comparative advantage in producing cars? Which country has a comparative advantage in producing grain?

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

What is the amount of loans from the rest of the world?
What is the current account balance?
What is the capital account balance?
What is the official settlements balance?

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.

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?

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

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?

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Robert · Accepted Answer

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
 
(a) For this situation,

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,...

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