| International Trade Theory 101 |
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1. Two neighboring small countries, A and B, both produce and consume computers and beef. To be comparable, we use the US$ to express the production cost in both countries. In country B, the cost to produce a computer and beef are $200 and $20, respectively.
In which of the following cost structures of country A, would country A NOT gain from exporting computers to and importing beef from B? |
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| Computer: $100, Beef: $30. |
| Computer: $100, Beef: $18. |
| Computer: $200, Beef: $20, but there is an increasing return to scale in producing computers. |
| None of the above. |
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2. Continuing from question 1: Land is scarce in Country A, which has relatively more abundant capital. Country B is abundant in land, while capital is a scarce resource. As we know, producing computers requires more capital, while producing beef requires more land. Suppose workers in country A enjoy the full freedom to choose whatever job they want and can adapt to the new job very quickly. If country A exports computers to and imports beef from B, who would get hurt in the long run in country A? |
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| Landowners only |
| Capital owners only |
| Workers only |
| Both landowners and workers |
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3. In April 2002, one Big Mac costs about 9.70 Rand (ZAR) in South Africa; it costs about $2.49 (USD) in U.S.. If the Law of One Price holds, what should be the exchange rate of ZAR to USD at that time? |
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| 1 USD = 0.26 ZAR |
| 1 USD = 10.9 ZAR |
| 1 USD = 3.9 ZAR |
| Somewhere between 3.9 ZAR/USD and 10.9 ZAR/USD |
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4. We know, however, that the exchange rate of ZAR with USD is 10.910 ZAR/USD in April 2002, so our prediction from the Law of One Price is far away from reality. Why is that? |
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| Some part of the Big Mac represents non-traded goods, like services. |
| There are transaction costs in international trade. |
| ZAR is undervalued at that time; it will appreciate in the future. |
| All of the above are possible. |
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