The United States and Russia each produce only bearskin caps and wheat. Domestic

Question

The United States and Russia each produce only bearskin caps and wheat. Domestic prices are given in the following table:

PRODUCTION

RUSSIA

UNITED STATES

UNIT

Bearskin Cap

10 Ru

$7

Per hat

Wheat

15 Ru

$10

Per quart

On April 1, the Zurich exchange listed an exchange rate of $1=1 Ru

1. Which country has an absolute advantage in the production of bearskin caps? Wheat?

2. Which country has a comparative advantage in the production of bearskin caps? Wheat?

3. If the United States and Russia were the only two countries engage in trade, what adjustments would you predict, assuming exchange rates are freely determined by the laws of supply and demand?

Explanation / Answer

1. Which country has an absolute advantage in the production of bearskin caps? Wheat?

Whea RUSSIA

bearskin caps   RUSSIA as it make the production cost greater

2. Which country has a comparative advantage in the production of bearskin caps? Wheat?

Whea UNITED STATES

bearskin caps   UNITED STATES it is very economical to them

3. If the United States and Russia were the only two countries engage in trade, what adjustments would you predict, assuming exchange rates are freely determined by the laws of supply and demand?

a balance in currency exchange rates is required and the law of supply and demand is not an actual law but it is well confirmed and understood realization that if you have a lot of one item, the price for that item should go down. At the same time you need to understand the interaction; even if you have a high supply, if the demand is also high, the price could also be high. In the world of stock investing, the law of supply and demand can contribute to explaining a stocks price at any given time. It is the base to any economic understanding.

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