Illustrate what will the exchange rate have to be to

Reference no: EM1340138

Absolute and comparative advantage explained in this answer

Consider the following two country-two goods world, with a single input, labor:
Daily production per worker
Commodity Portugal England
Wine (barrels) 2 OR 1
Cloth (bolts) 4 OR 3

a) Does either country have absolute and/or comparative advantage in any product? Provide support for your answer by computing the "resource costs" or opportunity costs for both products in both countries.

b) Following your answer to part a, is there any advantage in trading here? At what "prices" will such trade occur? In other words, what is the maximum amount of cloth relative to wine at which trade will occur? What is the minimum amount?

c) Suppose the total cost of labor to produce daily output in each country is £20 in England, and E1600 (escudos) in Portugal. Further, let the exchange rate is £1=E50, what is the price of the goods in each country in pounds?

d) What will the exchange rate have to be to discourage Portuguese imports of British goods? Similarly, what will the exchange rate have to be to discourage British imports of Portuguese goods?

Reference no: EM1340138

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