This is the unit output of cigars and calculators for countries A and B Total pr

Question

This is the unit output of cigars and calculators for countries A and B Total production costs per day are $30 in A and 120 pesos in B. Answer the following questions: 1. What is the unit output cost per day for Calculators & Cigars for Country A & B? 2. If the exchange rate is $1 = 10 pesos, determine the direction of the flow of trade? 3. If the exchange rate is $1 = 12 pesos, determine the direction of the flow of trade? 4. If the exchange rate is $1 = 8 pesos, determine the direction of the flow of trade?

Explanation / Answer

Answer 2 At exchange rate $1=10 pesos

unit production in B in terms of dollars=Calculators=60/10=6

cigars=12/10=1.2 hence calculators will trade from A to B as production cost/unit is cheaper in A and cigar will trade from B to A since production cost/unit is cheaper in B than A

Answer 3

At exchange rate $1=12 pesos

unit production in B in terms of dollars=Calculators=60/12=5

cigars=12/12=1 hence calculators will not be traded between A & B as production cost/unit is equal. and cigar will trade from B to A since production cost/unit is cheaper in B than A

Answer 4

At exchange rate $1=8 pesos

unit production in B in terms of dollars=Calculators=60/8=7.5

cigars=12/8=1.5 hence calculators will trade from A to B as production cost/unit is cheaper in A and cigar will not be trade between A & B since production cost/unit is equal in both the countries

Answer 1 A B Calculators 30/6=5 120/2=60 Cigars 30/20=1.5 120/10=12

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