The United States and Russia each produce only bearskin caps and wheat. Domestic
ID: 1173172 • Letter: T
Question
The United States and Russia each produce only bearskin caps and wheat. Domestic prices are given in the following table.
Russia US
Bearskin caps 10Ru $7
Wheat 15Ru $10
Exchange rate is $1 = 1Ru.
a. Which country has an absolute advantage in production of caps? In wheat?
b. Which country has a comparative advantage in production of caps? In wheat?
c. If the US and Russia were the only two countries engaging in trade, what adjustments would you predict, assuming exchange rates are freely determined by the laws of supply and demand.
Explanation / Answer
A country is said to have an absolute advantage in the production of a good if it can produce the good at lower cost in terms of resources relative to another country.
A country is said to have a comparative advantage in the production of a good if its opportunity cost in terms of other goods that could be produced instead is lower than that of another country.
The table below outlines the possible tradeoffs of producing
Russia US BEar Skin wheat BEar Skin wheat 10 0 7 0 0 15 0 10Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.