Numerical Questions Practice Set
Question 1
Suppose that the world price for a good is 40 and the domestic demand-and-supply curves are given by the
following equations:
Demand: P 100 – 4Q
Supply: P 10 5Q
a. How much is consumed?
b. How much is produced at home?
c. What are the values of consumer and producer surplus?
d. If a tariff of 20% is imposed, by how much do consumption and domestic production change?
e. What is the change in consumer and producer surplus?
f. How much revenue does the government earn from the tariff?
Answer
Solved during in the revision lecture. Refer to your notes.
Question 2
Use the following information to answer the questions below. Country: Land
Balance of Payments Account Amount
Goods imports $93,000
Goods exports $83,000
Services imports $15,500
Services exports $23,600
Investment income receipts $43,700
Investment income payments $27,700
Unilateral transfers, net -$3,600
Capital Account, net -$500
Net acquisition of financial assets -$38,500
Net incurrence of liabilities $42,000
a. What is the balance of trade?
b. What is the current account?
c. What is the financial account balance?
d. What is the statistical discrepancy?
Answer
Trade Balance = 83000+23600 – 15500 – 23600 = -1900
Current account = -1900 + 43700 – 15500 – 3600 = 10500
Financial account balance = 42000 - 38500 = 3500
Statistical discrepancy = -(10500-500+3500)= -13500
Question 3
Use the information in the table on labor productivities in France and Germany to answer the questions.
Output per Hour Worked
France Germany
Cheese 2 kilograms 1 kilogram
Cars 0.25 0.5
a. Which country has an absolute advantage in cheese? In cars?
b. What is the relative price of cheese in France if it does not trade? In Germany?
d. Which country has a comparative advantage in cheese? In cars? Explain your answer.
Answer
a. France has the absolute advantage in cheese and Germany in cars. This follows because France’s
productivity is higher in cheese and Germany’s is higher in cars.
b. The autarkic relative price of cheese in France is one-eighth car per kilogram; in Germany it is one-half
car.
c. France has a comparative advantage in cheese because its opportunity cost is lower (1/8 car versus 1/2
car in Germany). By the same reasoning, Germany has a comparative advantage in cars.
Question 4
According to the following table, which country is relatively more labour-abundant? Explain your answer.
Which is relatively more capital-abundant?
United States Canada
Capital 40 machines 10 machines
Labor 200 workers 60 workers
Suppose further that the production requirements for a unit of steel is 2 machines
and 8 workers, and the requirement for a unit of bread is 1 machine and 8 workers.
a. Which good, bread or steel, is relatively capital-intensive? Labor-intensive? Explain your answer.
b. Which country would export bread? Why?
Answer
The capital-labor ratios are 1/5 and 1/6 for the United States and Canada. Since 1/5 is greater than 1/6, the
United States is capital abundant. By the same reasoning, the labor-capital ratio is higher in Canada, so it is
labor abundant.
The capital-labor ratio to make steel is 1/4; to make bread it is 1/8. Hence steel is more capital intensive and
bread is more labor intensive.
Since the United States is capital abundant and steel is capital intensive, according to the Heckscher-Ohlin
trade model, the United States will export steel and Canada will export bread.
Question 5
a) Suppose the US dollar-Japanese yen exchange rate is 0.9349 dollar per yen, and the US dollar-Swiss franc
rate is 1.6723 dollars per franc. What is the franc-yen rate?
b) Suppose the USD-GBP exchange rate is 1.2497 USD per GBP. Since the base year, inflation has been 5
percent in the United States and 7 percent in the United Kingdom. What is the real exchange rate? In real
terms, has the dollar appreciated or depreciated against the pound?
c) Suppose that US (home) interest rates are 4% more than rates in the UK (foreign). Would you expect the
dollar to appreciate or depreciate against the euro, and by how much?
Answer:
a) The franc-yen rate is (0.9349 dollar per yen) ÷ (1.6723 dollars per yen) = 0.5590 franc per Japanese yen.
107
b) The real exchange rate is 𝑅𝑟 = 1.2497 × = 1.2735. The USD has depreciated against the pound.
105
c) Capital would flow into the United States increasing the supply of foreign exchange. Due to higher
interest rates, investment at home is more attractive than in Europe. This also reduces the demand for
foreign exchange. As a result, we expect the dollar to appreciate by 4%. This interest rate arbitrage
activity continues until equilibrium is restored (that is, interest rate parity is reestablished).
Question 6
The following table summarises labour requirements to produce cars and computers in two countries.
Labour hours required
France Germany
Cars 20 40
Computers 10 15
a) Which country has an absolute advantage in cars? In computers?
b) Calculate the opportunity cost of cars in France if it does not trade? In Germany?
c) Which country has a comparative advantage in computers? In cars? Explain your answer.
Answers:
Labour hours required
France Germany
20 40
Cars
1c=2pc 1c=2.6pc
10 15
Computers 1pc=0.5c 1c=0.39
a) France has absolute advantage
in both because it uses less input hours to produce both products.
b) See the table above for values, the answers are in red.
c) France in Cars. Germany in PCs.