Problem Set #5

Macro Unit 5: International Trade and FOREX

1. Comparative Advantage The following figures represent the amount that can be produced with a fixed amount of factor inputs.

Bananas Sugarcane Jamaica 100 50 Puerto Rico 160 40

a. Which country has the absolute advantage in bananas? Which country has the absolute advantage in sugarcane? Explain how you arrive at that answer? b. What is Jamaica's opportunity cost for producing one unit of bananas? What is Puerto Rico's opportunity cost for producing one unit of sugarcane? c. Which country has the comparative advantage in bananas? Which country has the comparative advantage in sugarcane? Explain how you arrive at that answer? d. Should these countries trade? If so, how should they specialize and why?

2. International Trade and Foreign Exchange

a. Define trade surplus and trade deficit. Use examples to explain the difference between the current account and the capital account. b. Explain the difference between appreciation and depreciation. Use supply and demand of US dollars to fully explain a situation that would cause the US dollar to depreciate.