Great Britain and the United States produce cheddar cheese and blue cheese Current domestic prices per pound for each type of cheese are given in the following table Suppose the exchange rate is pound 1 $1 a If the price ratios within each country reflect resource use, which country has a comparati...

a The opportunity cost of a pound of blue cheese is 15 pounds of cheddar cheese in the United States ...

Great Britain and the United States produce cheddar cheese and blue cheese. Current domestic prices per pound

Question:

Great Britain and the United States produce cheddar cheese and blue cheese. Current domestic prices per pound for each type of cheese are given in the following table:

United States Great Britain Cheddar cheese Blue cheese £3 £6 $6 $9

Suppose the exchange rate is £1 = $1.
a. If the price ratios within each country reflect resource use, which country has a comparative advantage in the production of cheddar cheese? blue cheese?
b. Assume that there are no other trading partners and that the only motive for holding foreign currency is to buy foreign goods. Will the current exchange rate lead to trade flows in both directions between the two countries? Explain.
c. What adjustments might you expect in the exchange rate? Be specific.
d. What would you predict about trade flows between Great Britain and the United States after the exchange rate has adjusted?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...

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