Output data per worker in Argentina and Mexico are as follows: The two products

Question

Output data per worker in Argentina and Mexico are as follows: The two products being compared are Aluminum and Zine production: Argentina: 20 Pounds of Aluminum: 40 Pounds of Zine Mexico: 150 Pounds Aluminum: 50 Pounds Zine If the trade is set at One pound Zine 3.5 Pounds Aluminum, then it will be to Argentina and_to Mexico a) Acceptable: Unacceptable b) Acceptable; Acceptable c) Unacceptable; Acceptable; d)Unacceptable; Unacceptable 21) Use above data: If trade is set at One Pound Aluminum = 0.25 Pounds Zine, it will be to Argentina and_to Mexico a) Acceptable; Unacceptable b) Acceptable; Acceptable c) Unacceptable; Acceptable; d)Unacceptable; Unacceptable 22) Assume that during the period 2010-2014. the US dollar weakens against the Mexican Peso and British pound. If an American company makes its' products in Mexico and sells it only in Britan. the effect of this situation on the net cash flow of the American Corporation is: a) it will increase b) it will decrease c) it will not change 23) What is the primary reason USA runs large deficits in the Current account category of Balance of Payments data: there are four components to Current account and one of them is the driving force behind this rising Current account deficit. Which is it ? a)Service balance b)Net Investment income balance Merchandise Balance d) Unilateral transfer balance

Explanation / Answer

NOTE: Do not post Economics questions under Finance. Use proper categories.

(20) (d)

Let's compute the opportunity costs (OC).

In Argentina:

OC of aluminium = 40/20 = 2 Zinc

OC of zinc = 20/40 = 0.5 Aluminium

In Mexico:

OC of aluminium = 50/150 = 0.33 Zinc

OC of zinc = 150/50 = 3 Aluminium

Trade is mutually beneficial if terms of trade (TOT) lies between OCs in both countries. If TOT be X, then

0.33 Zinc < X < 2 Zinc, or

0.5 Aluminium < X < 3 Aluminium

Given TOT will be unacceptable to both countries since it lies outside the acceptable upper bound.

(21) (d)

Using above analysis, Given TOT will be unacceptable to both countries since it lies outside the acceptable lower bound.

Note: First 2 questions are answered.

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