Question

1. Suppose that, with a given unit of labour, India can produce40 basketball hoops or 60 basketballs and Nepal can produce10 basketball hoops or40 basketballs. This scenario is illustrated below:

	Hoops (H)	Balls (B)
India	40	60
Nepal	10	40

a.Assume that the equilibrium terms of trade are1H=2B. If Nepal still wants to consume equal amounts of both hoops and balls, show its points of production, consumption, and the amounts of exports and imports.

c.Show the gains from trade for Nepal.

2.Suppose that the price of labour falls. Explain how producers would respond, using the isocost/isoquant framework. What would happen to the capital/labour ratio?

3.Suppose that you observe the following exchange rates:
$1.75/£; $.0075/¥; and £.005/¥.
Is there cross-rate equality? If yes, why? If not, what would you expect to happen?

Answer 1