1. (PPP) Richland and Poorland each have two industries, traded TVs and nontrade

Question

1. (PPP) Richland and Poorland each have two industries, traded TVs and nontraded house maintenance. The world price of TVs is RL$100 (RLS = Richland dollar). Assume for now that the exchange rate is R$1 -1 PL peso (PL Poorland peso) and that prices are flexible. It takes 1 day for a worker in each country to visit and maintain 1 house. It takes 1 day for a Richland worker to make a TV, and 4 days for a Poorland worker. In the following analysis, Richland is treated as the Home country and Poorland as the Foreign country.

Explanation / Answer

Rich land wage=1tv which is equal to 100RLdolars.poorland wage is 1/4 of tv=100/4=25 pl pesos. Poor to rich wage ratio is 25/100=1/4

B price of house maintenance in rich land is 1tv or 100 dollars. In poor country it is 100/4=25 pesos

C in Richmond is underroot of 100 multiplied by100=100 and in poor land is square root of 25 multiplied by 25=25

D 100/100=1 ,25/25=1.clearly standard is same when taking local currency and prices into consideration. So poorland is not as poor as reflected in A

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